19.11.07 PROPERTY PURCHASES AND CAPITAL ALLOWANCES

In practice the most commonly encountered capital allowances, and relevant to most commercial property users and investors, are plant and machinery allowances. These can be claimed for expenditure on business equipment, including most moveable assets, as well as many fixtures integral within buildings, e.g. heating and ventilation installations, hot water, lifts, sanitary appliances and fittings, air conditioning.

Very often purchase price allocations are written into agreements for the sale and purchase of property, typically between the property, fixtures and fittings and sometimes goodwill.

The allocation is usually to mitigate Stamp Duty Land Tax (SDLT) and also to provide the allocation for capital allowances purposes. However this approach can give rise to several problems.

Firstly contract allocations are required for SDLT purposes because SDLT is payable on interests in land (including plant and non-plant fixtures) but is not payable on non-land (e.g. chattels or goodwill).

By contrast capital allowances are available for expenditure that qualifies for tax relief (usually plant and machinery irrespective of whether it is fixed or moveable) but are not available on non-qualifying expenditure such as land and buildings.

Therefore it can be seen that, unless no moveables are being acquired, different valuations are required for SDLT and capital allowances purposes.

Unless the purchaser and seller jointly elect to agree a disposal value for plant and machinery the only permissible approach is a “just and reasonable” apportionment.

It is therefore clear that arbitrary contract allocations are unlikely to be just and reasonable and HMRC’s instructions on capital allowances and SDLT make it clear to Inspectors that contract allocations may not be reasonable and could well be an area subject to enquiry.

Also, for capital allowances purposes there is long-standing authority that HMRC, the courts and purchasers of property are not bound by contract allocations. Therefore these are ineffective in practice and do not provide the reassurance often imagined.

To achieve accuracy in tax returns ideally different just and reasonable apportionments should be used for SDLT and capital allowances purposes based on independent valuations prepared for their respective purposes.

It is also often misconceived that savings achieved by claiming capital allowances will be cancelled out by an increased chargeable gain if the building is ever sold. This however is not the case and the legislation makes it clear that a capital allowances claim does not create or increase a chargeable gain. There are, however, special rules applying when a capital loss results, preventing the cost of assets that have qualified for capital allowances from creating or increasing a loss.

Inadequate or no claims at all are often made for acquisition of second hand properties. Although capital allowances claims are often stated to be simply a cashflow benefit any deferral of tax is valuable and if the property is held long-term there is considerable erosion of the tax liability through inflation. Often the tax savings through capital allowances become permanent if the assets are stripped out or the building demolished.

In new build projects it is very difficult to identify all the integral fixtures when looking at contractors stage payment certificates. So it is therefore difficult, without specialist surveying assistance, to identify the qualifying fixtures and their cost.

If the capital allowances claims are missed it is still possible to claim them in any later periods tax return providing the qualifying assets are still owned in the later period. With the Chancellor’s announcement that future writing down allowances are to be reduced there is a great incentive to ensure claims are maximised for plant allowances before April 2008 to ensure they qualify at the higher rate.

Publication: The Firm

Date: November 19th 2007