In an age of shared developers risk, differing tax rates and income driven returns, which party takes the benefit of Capital Allowances can often be a forgotten factor. Here we explore the key points to consider as to who can claim Capital Allowances on developments. The legislation provides for the possibility that anyone can claim Capital Allowances providing that you satisfy three key requirements.
Firstly, that you can demonstrate that you have incurred capital expenditure, which is simply paying for works which qualify. For most development projects, this will include expenditure on, but not limited to items such as heating, air conditioning, electrical systems, lifts, furniture, fixtures and fittings. To the extent that the expenditure is to be met by a third party, say in the form of grant funding, that expenditure must be treated as non-qualifying for Capital Allowances. In such scenarios, early tax planning around what expenditure is being paid for and by who, will limit the reduction to any claim. It should however be noted, that the way in which a development is to be financed does not affect the ability for a Capital Allowances claim to be made.
Secondly, that the person or entity paying for those works must have an interest in the land on which the qualifying fixtures are to be installed, which is typically a freehold; however, often overlooked is that it applies to all leases, so tenants or traders can claim as well as landlords.
The final requirement is that there is the intention to retain those qualifying fixtures and for them to be used in your business or trade, either as an individual, partnership, company or as property held by an investor. Conversely, if your intention is to develop a property and to then flip it on, to the extent that the property is held as trading stock, Capital Allowances cannot be claimed.
Businesses or investors based in the UK claiming Capital Allowances reduce either the amount of corporation tax payable by a company or income tax by an individual or partnership. If the individual, company or business is based offshore and registered outside the UK, then they too can claim Capital Allowances as all income remitted off shore is subject to withholding tax payable at 20% in the UK. As Capital Allowances is a form of tax relief available against certain qualifying property expenditure, for an entity to benefit they must be subject to tax. So certain non-tax paying entities such as UK pension funds (note some offshore pension funds are still subject to tax), registered charities and government bodies do not claim, as there is no benefit to do so.
For properties held within tax transparent vehicles, such as REITs (Real Estate Investment Trusts) and PAIFs (Property Authorised Investment Funds), the tax charge is on the investor not the landlord, however the respective governance requires that Capital Allowances are still claimed where there is entitlement to do so, under a shadow tax regime.
A key point that can often be overlooked, is that even where a business or investor held development is in a loss-making position at the time they embark on a project, the entitlement to claim Capital Allowances still exists. Furthermore, in most cases it is beneficial to still claim in the year of expenditure as the allowances can be disclaimed and rolled forward to future years. This provides businesses and investors with a valuable insurance policy in future years, when taxable income may become due.
To discuss this article or if you have any general Capital Allowance queries, then please get in contact with one of our Directors.