The introduction of new rules in April 2014, meant that for a Purchaser to secure Capital Allowances they had to enter into an election with the Seller within 2 years after completion. From next month, any deals completed soon after this date are now fast approaching the deadline risking losing out on the tax relief altogether.
For example, if you had acquired a property in May 2014 and the Seller had not claimed Capital Allowances, in order for the Purchaser to make a claim they must obtain a signed election before May 2016 or lose the allowances. It is worth remembering that this rule change risks causing not only a loss of tax relief for the Purchaser, it also will deny the opportunity for the Purchaser to abstract a benefit upon disposal.
So what is the potential loss in cash terms? If we take our example of a purchase of say an office building in May 2014 for £10m, where the Seller acquired the property in 2007 and had inherited an s198 election for £1 on their purchase. Then as part of an asset management initiative before sale the Seller refurbished all the office cores spending £2m in the process. They then sell to our purchaser in May 2014, but did not get around to claiming Capital Allowances on the £2m refurbishment. Under the new rules the Purchaser must get the Seller to enter into an election to pass the benefit of the unclaimed Capital Allowances or lose out.
This will require the Purchaser quantifying the unclaimed allowances on the Seller’s behalf, which based on a £2m refurbishment could be as much as £1.6m of allowances or £320,000 in cash terms, based on a 20% corporate or overseas income tax payer.
The ability to get the Seller to cooperate to sign up to an election may come down to relying on the goodwill of the Seller although if the purchase contract has been drafted robustly it will provide for a cooperation clause to allow for such an event. In the case of buying through receivership or administration, often Capital Allowances are completely overlooked as being too difficult to pursue; however, there are options available and Veritas Advisory has recently been successful in securing significant allowances in such a scenario. There is also the final option of going to First-Tier Tribunal, a course of action that we are likely to see grow as these new rules bed down.
If you are a client or have acted for a client who has purchased property, then please call one of our Directors who will provide a no fee review to assess the Capital Allowances position.