In the current market with lower loan to values, government policy tightening the ability to mitigate tax through carried forward losses and loan interest payment. Capital Allowances remains one of the key ways to obtain a significant tax saving against property expenditure. Here we set out what the benefit looks like for a business or an investor.
Not fully utilising the benefit of Capital Allowances on a development will ultimately reduce profits after tax for a business or lower the returns on an investment.
Often for a business or investor embarking on a development, its primary concern is the management of costs to deliver the project within budget. Whilst the claiming of Capital Allowances does not reduce the outlay of expenditure to pay for such developments, they do reduce costs post completion.
The development of a standard Cat A office which costs say £10m to build, will typically attract Capital Allowances of up to £4.5m. In benefit terms, if the property is to be held by an owner occupier or investor deriving an income, paying tax at say 20%, the total benefit to them would be a £900,000 cash saving, by reducing the amount of tax which would otherwise be paid.
From a feasibility point of view, it could therefore be argued that the net cost of the development is rather £9.1m, albeit the allowances are claimed over a number of years.
The benefit attained, is directly correlated to the given tax rate payable by the claimant. Therefore, the benefit to a high net worth individual, who could be in a partnership, paying 45% tax rate is going to have a higher cash benefit than for a corporate tax payer of currently 19%.
Irrespective of the benefit attainable, research as shown that majority of claims are not processed, down to a variety of reasons, which means that in our example £900,000 of tax revenue is passed back to HMRC.
Now not all parties can claim Capital Allowances, with the most common reason being that the development is to be held as trading stock with the intention to sell on once completed. In this scenario, the Capital Allowances should still be quantified so that they can be included within the heads of terms. By highlighting to a potential buyer, the unclaimed value of Capital Allowances whilst may not always lead to a higher purchaser price, but a significant value can still be added to the deal as part of the overall negotiations.
Finally, for REITs (Real Estate Investment Trusts) and PAIFs (Property Authorised Investment Funds), who are legally required to claim Capital Allowances under a shadow tax regime. Whilst there is no direct tax benefit, as tax is paid at an investor level, it does however provide a benefit by retaining cash in the business by reducing the amount that has to be distributed to the investors via a PID (property income dividend).
To discuss this article or if you have any general Capital Allowance queries, then please get in contact with one of our Directors.