From April 2014, changes to the capital allowances rules have been introduced that may affect the continued availability of capital allowances on fixtures following the sale, or the grant of a lease at a premium, of commercial property.
This article provides a brief overview of the changes and explains how they will affect buyers, sellers and lessees of commercial property.
What are Capital Allowances?
Capital allowances provide tax relief for expenditure on certain capital items. Where available, a business can deduct capital allowances from its taxable profits, therefore reducing its liability to tax. There are many types of capital allowances, the most common being those available for expenditure on: (1) integral features of a building (such as lifts and air conditioning units); and (2) other plant and machinery (such as kitchen equipment).
Capital allowances operate to enable a business to gradually write‑off the cost of certain qualifying capital assets. Under the capital allowances regime, a business can apply an annual writing down allowance (WDA) against expenditure on such assets. Broadly, integral features are eligible for a WDA of 8%, whilst other plant and machinery is eligible for a WDA of 18%. When claiming capital allowances a business will “pool” together the expenditure on plant and machinery eligible for a WDA of 18%. A separate “pool” will also be created for integral features, where a WDA of 8% is available. The WDA is then applied annually on a reducing balance basis. For example, in year 1, if expenditure on qualifying plant and machinery is £1,000,000, a deduction of £180,000 will be allowed, whereas in year 2, the deduction will only be £147,600 (18% of £820,000).
There are special rules dealing with capital allowances on fixtures within a building (the “Fixtures Rules”). When a property is sold or a lease granted at a premium, it may be desirable to apportion part of the purchase price/lease premium to fixtures. The Fixtures Rules govern how any capital allowances on fixtures are transferred to a buyer/lessee.
Changes to the Fixtures Rules
From April 2014, changes to the Fixtures Rules will affect how capital allowances are transferred to buyers/lessees in commercial property transactions.
Under the new rules, capital allowances will only be available where the following conditions have been met:
Expenditure incurred on the fixtures must be allocated to the seller’s/lessor’s appropriate “pool” of expenditure on capital allowances.
2. Fixed Value or Election Requirement
Where the seller/lessor has claimed capital allowances on fixtures, it is necessary to apportion part of the purchase price/lease premium to those fixtures. Once apportioned this value must be fixed, by both the buyer and seller (or lessee and lessor) entering into an election. Once completed, the election must be submitted to HM Revenue & Customs within two years of the purchase/lease of the property.
If the parties cannot agree on a value for the fixtures, either party may apply to the Tax Tribunal for a determination. Such an application must be made within two years of the purchase/lease of the property.
There is a third condition, the “Disposal Value Requirement” that only applies in certain circumstances; broadly, where the seller has previously claimed capital allowances on fixtures and is now selling the property for a price below market value, or the sale involves merging more than one interest in land (i.e. freehold and leasehold interests are being merged). A discussion of this condition is beyond the scope of this briefing.
Implications for Property Owners/Lessors
If the above conditions are not satisfied, the buyer/lessee and all future buyers/lessees will be unable to claim capital allowances on the relevant fixtures.
Therefore, where a significant part of the value of a property could be attributed to fixtures, failure to adequately deal with capital allowances on those fixtures could substantially reduce the value of the property.
Implications for Commercial Property Transactions
It is recommended that parties raise the issue of capital allowances on fixtures as early as possible. Additional provisions may need to be included in the legal documentation to deal with the new Fixtures Rules. Therefore, ideally, any action that needs to be taken should be agreed in the Heads of Terms.
It should be noted that the Commercial Property Standard Enquiries (CPSEs) required to be completed by sellers before a sale of commercial property have been amended to reflect the additional information regarding expenditure on fixtures that buyers may now require. Commercial property owners should ensure that they maintain accurate records of expenditure on fixtures so they can fully respond to the amended CPSEs.
Certain tax exempt entities (such as pension funds and charities) are unable to claim capital allowances and therefore, will be unable to “pool” their expenditure. However, when purchasing commercial property, such entities should still ensure that other elements of the Fixtures Rules are satisfied to secure the continued availability of any capital allowances on fixtures for subsequent purchasers/lessors.
Ultimately, all parties to a commercial property transaction are urged to consider the relevance of the new Fixtures Rules carefully and seek independent legal advice as appropriate.