Capital Allowances are often not addressed at the time of purchase due to clients not fully understanding the value of benefit at stake and the potential to miss out altogether if not picked up before completing on the deal. Here we set out the factors which determine the benefit and their value.
The difficulty to claim Capital Allowances on a second-hand purchase is that it is not an obvious opportunity to claim, but often claims are still available. The original claim is based on an apportionment of the purchase price and so the age or quality of the assets does not matter, rather the price paid for those assets and to establish the extent to which those assets have already been claimed on.
New legislation has now made it a complete loss scenario if the unclaimed Capital Allowances are not quantified and agreed to be passed across as part of the sale. This does not mean the value of allowances has to be quantified before completing the deal, as there is a 2-year time limit within which to agree to an election, but ideally it should be considered before exchange to negotiate the most favourable position.
The question of benefit is not a simple case of plugging in a postcode finder for the Capital Allowances figures to be self-generated, nor can any standard qualifying percentages be applied. To that extent, it does require someone to assess, typically a specialist Capital Allowances advisor, to determine whether there is a material value of benefit which is worthwhile pursing.
The added difficulty with purchase claims is that the Buyer must establish clear entitlement to claim. If the Seller cannot claim such as a pension fund or holds the property on a trading account, then the Buyer only requires a statement of no claim in the contract. There is still however, the need to check all prior owners of those qualifying fixtures to see to what extent a claim has been made, but this is often attainable through direct enquiries.
If the Seller has claimed, then the simplest way to address the position is to state in the purchase contract that any unclaimed Capital Allowances will pass across to the Buyer. This facilitates the ability for the Buyer to then revisit the position after completion should there be additional unclaimed allowances.
From the Seller’s side there is no impact, as if they have claimed they still hold onto that benefit and often if the property is within single asset entities there is no benefit in retaining the unclaimed allowances. Proposed £2.00 s198 elections which may restrict the Buyer fully are often a default position and should in some instances be challenged, although it is however worth noting that overage claims are still possible.
It is not only the price paid for a property which dictates benefit but also what landlord fixtures are contained within it. Because you must apportion the purchase price between land, buildings and the qualifying plant and machinery, the value of Capital Allowances claimed is a proportion of the purchase price and the assets are valued as at market value at date of completion.
For an unrestricted Capital Allowances purchase claim you may expect up to 24% of the purchase price to qualify for Capital Allowances, dependent on type of property. So, if you were to buy a property for £1m the claim value could be £240,000. In terms of what that benefit looks like in the hands of the client, you simply multiple the total claim value by their given tax rate, so for a high net worth individual paying 45% tax, it would equate to a cash saving of £108,000, so not a cash saving you would want to miss out on.
The second factor which alters that benefit is the extent of qualifying fixtures within the property, typically the qualifying fixtures are the non-structural elements ie not enclosing walls, floors or roofs, but rather the items which make a building function such as heating, lighting, protection systems down to mechanical door closers, blinds and sanitaryware. So, if you have a property which is highly reliant on such expenditure, such as an office, hotel or care home, then the claim value is going to be higher. Contrast that to an empty retail shell, which is mainly structure and has a smaller proportion of qualifying assets to which Capital Allowances can be claimed on.
It is for this reason that providing general indicative qualifying percentages is dangerous to do and blanket percentages should never be employed; the value of allowances in one office can vary considerably to the office next door due to extent of legal entitlement, type of fixtures and even the rental income and build costs. An initial review, preferably before exchange will help to gauge benefit and to encourage the client to investigate it further, so they are made aware of the potential cash saving that could be missed out on.
Veritas Advisory can provide clients with a free due diligence assessment relating to current or past acquisitions to determine eligibility and the value of benefit at stake.