Capital Allowances: Integral Features

It is important when buying and selling commercial property, that thought is given to Capital Allowances since issues not resolved within two years of disposal can create unwanted consequences for both vendor and purchaser.

Finance Act 2012 amended the rules in relation to claiming capital allowances on fixtures for capital expenditure on the acquisition of property on or after 1 April 2012 (for companies) or 6 April 2012 (for individuals)

These rules make the availability of capital allowances to a purchaser on the acquisition of a property containing fixtures conditional on the two parties agreeing a value to be attributed to the embedded plant (e.g. air conditioning systems, lift shafts, some mezzanine floors, water and electrical systems etc). The value should be agreed as part of the sale negotiations.

The purpose of the relevant legislation is to ensure expenditure is only written-off once against taxable profits over its economic life. Where a purchaser wishes to claim capital allowances on fixtures in a property:

  1. the past owner must have allocated its expenditure on the fixtures to a capital allowance pool prior to its sale of the property or must have claimed the annual investment allowance in respect of its expenditure; and
  2. a section 198 CAA 2001 joint election must be entered into within two years of the buyer’s acquisition of the interest in the property or, on application of either the buyer or the seller within two years of the buyer’s acquisition of the interest in the property, the First Tier Tribunal must determine an amount of the purchase price to be apportioned to the fixtures.

These provisions do not apply in circumstances where there has not been a previous owner who was entitled to claim capital allowances, for example, where a property had been purchased from the original developer of the building. However, they apply if there has been a ‘past owner’ who was entitled to claim capital allowances, even if it was not that person who sold the building to the current owner.

There are significant due diligence requirements when purchasing from persons that are unable to claim capital allowances in order to discover whether capital allowances will be available to the purchaser, or to any future purchasers of the property.

For further information, please contact your usual Beavis Morgan Partner.