The Government has announced a consultation on reforming the system of claiming capital allowances for expenditure on fixtures for both new and secondhand buildings. Amongst other proposed changes, this would affect how section 198 elections are agreed when a property is sold

The closing date for responses to the consultation is 31 August 2011. It is anticipated that any changes would be included in the Finance Bill 2012.

Under the current rules, businesses can claim capital allowances as a deduction from their tax calculation on the expenditure they have incurred on fixtures in a building, including for example hot and cold water systems, air conditioning, heating systems and lifts. Capital allowances are claimed over a number of years as a percentage of the expenditure on a reducing basis. There is no time limit for making a claim so long as the asset is still owned and used in the business. Where a building is sold then the buyer can claim capital allowances on the part of the price that relates to the fixtures. If this figure differs from the seller's tax written down value for the fixtures then the seller will incur a balancing charge or a balancing allowance as the case may be. The parties can fix the apportionment by jointly making what is known as a section 198 election. In the absence of such an election each party can choose to use an apportionment which is just and reasonable.

The purpose of the capital allowances provisions is to allow depreciation on certain capital assets to be claimed once as a deduction in the tax calculation. However the Government is concerned that businesses may be claiming allowances more than once on the same fixture. This can happen because the lack of time limits can mean a business can file a new claim at a time when the records are no longer available to prove whether a claim has already been made on that asset. The Government is particularly concerned about the sale of buildings because the records of previous owners are often not available. Also, in the absence of a section 198 election, it is easy for the seller and buyer to use different figures for capital allowances in their tax calculations.

The key proposed changes that that consultation covers are:  

  • Businesses must pool their expenditure on fixtures within a short period after acquisition in order to qualify for capital allowances. The period proposed is either one or two years;
  • On the purchase of a secondhand building, the purchaser will not be able to claim capital allowances on the fixtures unless it has agreed with the seller the amount of the sale price attributable to the fixtures and both parties have formally notified this to HMRC. In effect the purchaser claiming capital allowances on the purchase of a building would be conditional upon having agreed a section 198 election with the seller; and
  • A seller and buyer will not be able to agree a section 198 election which is less than the tax written down value of the fixture in the hands of the seller. This would prevent a seller accelerating the benefit of the capital allowances he receives by requiring a buyer to agree a section 198 election which apportions just £1 to the fixtures in the property.

If these proposed changes are implemented then it will be more difficult for buyers to claim capital allowances on fixtures when they purchase buildings. Buyers will need to make full enquiries of the seller's capital allowances position (and indeed sometimes even the capital allowances position of the previous owner) and insist that it is recorded appropriately at the time of the sale if they want to be able to claim the benefit of the capital allowances. Sellers would be well advised to check their capital allowances records are in good order and reliable. Sellers who can evidence the capital allowances position and pass the benefit on to the buyer may, after these changes, be able to command a better price for their properties.