As of April 2012, it is essential that “section 198” capital allowance elections are made by the buyers and sellers of all properties in respect of which expenditure qualifying for capital allowances has been or may be incurred. This includes circumstances where the buyer or seller is a non-taxpayer, such as a charity or pension fund, which cannot itself claim capital allowances. This follows legislative changes included in the Finance Act 2012, which received Royal Assent in July.

Background

Capital allowances are the mechanism by which the tax system compensates for the depreciation in value of a company’s capital assets and the regime also acts as an incentive for companies to invest. In basic terms, the rules allow qualifying expenditure to be written off against taxable profits on a reducing balance basis. Different categories of capital investment attract different rates of capital allowance relief, and so the capital costs incurred must be grouped into pools of assets qualifying for the same rate of relief. For example, plant and machinery expenditure goes into a general pool which currently gives an 18 percent rate of allowance, whilst so-called “integral features” qualify for allowances at eight percent.

When a seller disposes of a property, it must bring a disposal value into account in respect of any fixtures upon which it has claimed capital allowances. The disposal value will represent that part of the purchase price attributable to the relevant fixtures. If the disposal value is higher than the seller’s written down value, the seller will be subject to a balancing charge. If the disposal value is lower than the seller’s written down value, the seller may benefit from a balancing allowance. “Section 198” capital allowances elections enable a buyer and seller to agree the amount of the purchase price attributable to integral features and plant and machinery. Without such an election, the purchaser must apportion a just and reasonable amount of the consideration to the fixtures, provided that the apportionment may not exceed the seller’s disposal value. Since the buyer will generally not know the seller’s disposal value, this presents a risk that the buyer will attribute a higher value to the relevant assets than the disposal value brought into account by the seller. Consequently, there may be a mismatch between the parties’ treatment of fixtures and they may both claim allowances on the same capital expenditure.

New Rules

Finance Act 2012 introduces legislation intended to resolve this issue. A purchaser wishing to claim capital allowances on fixtures on a property must satisfy two conditions:

  • the seller must have claimed capital allowances in respect of qualifying expenditure in a chargeable period beginning before the sale; and
  • within two years after the sale either a section 198 capital allowances election must be made by the seller and the buyer or an application must be made to the First Tier Tax Tribunal for it to determine the disposal value of the fixed plant.

The same requirements must be satisfied where a buyer purchases a property from a pension fund or charity. This poses potential concerns as, since non-taxpayers cannot claim capital allowances, they are unable to pool their expenditure or enter into capital allowances elections. However, the draft legislation provides that the requirements will be satisfied if a previous owner who was entitled to claim capital allowances pooled expenditure for the purposes of claiming allowances and entered into an election. Therefore a buyer from a non-taxpayer may still be entitled to claim capital allowances if that buyer obtains:

  • a statement by the non-taxpayer that more than two years have elapsed since the non-taxpayer acquired the fixture (preventing any election or application to the tribunal in respect of that earlier sale); and
  • a statement by the previous owner who sold to the non-taxpayer of the disposal value it brought into account.

Conclusion

The new legislation imposes much stricter obligations regarding capital allowances on the transfer of property. This applies not only where the buyer is protecting its own right to claim capital allowances but also where the buyer is unable to claim capital allowances but wishes to retain their benefit for any future purchaser. As a result, it is increasingly important that buyers enter into capital allowances elections on the acquisition of a property. The other point to note is that the legislation may be particularly problematic for purchasers of property from non-taxpayers such as pension funds and charities. Buyers will wish to ensure that the seller’s position in relation to capital allowances is properly investigated and disclosed and that appropriate protections regarding their entitlement to allowances and the making of any capital allowances elections are sought.