Single Purpose Vehicles (SPVs) are able to enhance the amount of tax relief when selling an asset by claiming a balancing allowance. Often overlooked, the simple example shown below demonstrates why Capital Allowances should be considered by all SPVs to offset both current and future tax liabilities.
An investor creates an SPV to forward fund an office development for £5million.
After 2 years of rental income of £400,000 per annum, the SPV receives an offer and sells for £6million, closing the company and ceasing the trade.
The interest and other associated acquisition costs equal the rental income for the first 2 years, so there has been no taxable profit on income during ownership.
However, assuming there are £1million of capital allowances available within the property the following tax relief can be realised.
Land purchase £1,000,000
Construction Cost £4,000,000
Total Development Cost £5,000,000
Tax Computation On Sale Without Capital Allowances (Year 3)
Sale proceeds £6,000,000
Less, base cost of development (£5,000,000)
Gross Profit on Sale £1,000,000
Tax Due @ 19% corp tax rate (£190,000)
Net Profit on Sale £810,000
However, £1,000,000 of Capital Allowances have been identified within the property.
Tax Computation On Sale With Capital Allowances (Year 3)
Sale proceeds £6,000,000
Less, base cost of development (£5,000,000)
Gross Profit on Sale £1,000,000
Capital Allowances Balancing Allowance (£1,000,000)
Taxable profit after Capital Allowances £0
Tax Due @ 19% corp tax rate (£0)
Net Profit on Sale £1,000,000
Increased Return on Investment £190,000
The following steps must be taken to claim the capital allowances
- Appoint CA advisor before transaction takes place
- Carry out due diligence on all new acquisitions
- Claim on all current and future expenditure
- Review all historic acquisitions on current properties
- Review all historic capex on current properties