ESG (Environmental, Social, Governance) is a framework to assess a business’ appetite for its green and social responsibility. We have increasingly seen commercial property investors aligning investment decisions with their ESG ambitions.
For property investors this means pursuing buildings which are energy efficient and those that provide spaces with the occupiers’ mental wellbeing in mind.
One of the tools used by Government to advance the environmental aspect of ESG is the introduction of the Minimum Energy Efficiency Standards (MEES). MEES sets the energy efficiency standard of commercial properties with an Energy Performance Certificate (EPC) rating.
This is set to increase from E to B by 2030 as a result property investors are undertaking significant capital investments in either refurbishing existing properties or developing new properties which are compliant.
Capital Allowances Opportunity
The impact of both ESG and MEES on the property sector is resulting in significant capital investments. To incentivise and reduce the net cost of capital investment, tax relief is available by way of capital allowances.
Currently you have the Annual Investment Allowance (AIA) of £1m which is available to individuals and corporates to write-off 100% of qualifying capital expenditure in the first year up to a limit of £1m, providing a potential tax saving between £450k (45% personal tax rate) to £250k (25% corporate tax rate) respectively.
For corporates there are further First Year Allowances (FYAs) such as the 100% Full Expensing and 50% Special Rate Pool FYA, both allow for 100% and 50% write-off of qualifying capital expenditure in the first uncapped, respectively. The FYAs are in place until March 2026.
Front End, not Back End, Capital Allowances Considerations
Capital Allowances, despite their enormous potential to reduce the net cost of capital projects, are still rarely considered at the outset of a project, or in value engineering exercises, but rather only on completion when less scope is available to maximise the tax efficiencies. Many companies or individuals incurring the expenditure still do not claim Capital Allowances at all.
Bringing forward consideration of the Capital Allowances, seeking advice from a Capital Allowances specialist, will only help reduce project costs, and in some cases, can make a project viable.