Capital Allowances – An Outline
Whilst depreciation is applicable for UK accounting purposes, at present there is no ability to depreciate assets for tax purposes (tax depreciation). Instead the UK tax regime provides some relief on investment in capital assets utilising capital allowances.
Capital allowances are governed by a distinct piece of tax legislation in the UK; The Capital Allowances Act 2001 (CAA2001). However for transactions falling into accounting periods predating 5th April 2001, for income tax purposes or 1st April 2001 for corporate tax purposes, the predecessor act, The Capital Allowances Act 1990 (CAA1990), would generally be applicable.
Capital allowances are the means by which UK taxpayers obtain tax relief, against their taxable profits or income, for their capital expenditure on certain fixed assets. There are numerous different forms and rates of allowances available within the CAA2001 which relate specifically to property, including:
- Plant and machinery allowances (General Pool 18% Writing Down Allowances)
- Integral feature allowances (Special Pool 6% Writing Down Allowances)
- Enhanced capital allowances (Abolished from April 2020)
- Land Remediation Relief (Potential 150% Allowances)
- Long Life Asset allowances (plant with economic life >25 years) (6% Allowance)
- Short Life Asset allowances (plant with economic life <4 years)
- Specific Property Allowances, e.g. Industrial Building Allowances*, Hotel Allowances*,
- Agricultural Building Allowances* (* denotes allowances currently being phased out)
- Enterprise Zone Allowances (100% and a limit of £125 Million)
- Structure and Building Allowances (2% straight line 19/20 & 3% straight line 20/21)
The most common of all the above allowances are the plant and machinery allowances that fall into two pools, the general pool plant and machinery and special pool integral features, which are typically available, to varying degrees, within all commercial properties (offices, retail, industrial, care and nursing homes, for example).
(The introduction of the Annual Investment Allowances has highlighted the importance of identifying qualifying capital allowances to maximise tax relief in the year the expenditure was incurred as failure to do so wont attract accelerated allowances).
Tax relief through the utilisation of Capital allowances should be properly considered as an integral part of any property transaction. This encompasses new build, alteration and refurbishment works as well as acquisitions and disposals of existing or “second hand” property.
To establish the potential type and quantum of capital allowances within a property transaction it is essential to consider the following:
On Property Acquisition – capital allowances may be available as an apportionment of the purchase price, subject to previous claims by previous owners. It is critical to investigate the capital allowance position as early as possible in the acquisition process to identify previous claims and to ensure that the acquisition contract is tailored to maximise the capital allowances for the purchaser.
Acquisitions may include acquisitions from developers or second hand properties for owner-occupiers or property investors.
JJM will undertake the required investigations, provide early estimates of the quantum and assist the legal team to ensure the correct actions and contractual clauses are incorporated into the contract. Post-acquisition JJM will survey the property and calculate the quantum of the allowable capital allowances within the relevant classifications.
Existing Property Portfolio it does not matter how long a building has been owned or when the expenditure was incurred, as a capital allowance claim can be made at any time. The property owner in these instances will be restricted to the earliest return that remains open.
JJM will undertake a review of a clients existing portfolio, to establish or review previous capital allowance claims.
On Property Sale – when selling a property on which the owner has claimed their entitlement to capital allowances, they should jointly enter into an Election under Section 198 CAA 2001 with the purchaser, agreeing to a disposal value of the plant and machinery on which the allowances have been claimed.
Entering into an Election will not only avoid suffering a claw back (balancing charge) on all or part of the capital allowances benefits enjoyed by the vendor whilst the plant and machinery was in their ownership, but it will also guarantee that the HMRC will accept the disposal value (within certain prescribed limits).
JJM can assist with Election compilation, Purchaser negotiation and liaison with the legal teams to safeguard previous claims.
New Construction, Fitting Out and Refurbishment Projects – the inclusion of integral features allowances and recent confirmation of incidental qualifying expenditure through new case law has complicated the analysis of capital expenditure projects and identification and classification of qualifying capital allowances.
Also in addition to plant and machinery allowances, additional capital allowances may be available through expenditure incurred on energy efficient plant and land remediation (i.e. the removal of asbestos or other qualifying contaminants).
JJMs specialists have a surveying and taxation background, making their skill set ideal for analysing contract sums and tender documents to maximise the capital allowance position
Tenant Contributions – where as inducement, a landlord provides financial contribution for tenants fit out works, correct structuring of the contribution and documentation could provide capital allowances for the landlord.
JJM will liaise with all parties to construct capital allowance advantageous structures, which are particularly important with non-tax paying tenants.Capital Allowance Quantum – The tables below illustrate the typical percentages of plant and machinery allowances that may be available for the various property types based on Build or Fit-out Cost or new / Second-Hand Purchase Price.
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Capital Allowance Flow Into Real Tax Savings – Whilst the tables above illustrate the typical percentages of plant and machinery allowances that may be available for the various property types based on Build or Fit-out Cost or new / Second-Hand Purchase Price, the HMRC require a fully disclosed analysis detailing the expenditure incurred against qualifying Capital Allowances, either General Pool Plant or Machinery or Integral Feature, which requires a specialist approach.
This analysis will take into account; the purchase price paid for property acquisitions, or the total contract costs including any direct costs such as professional fees and direct expenditure for new build or fit-out contracts.
Should you require any further information please contact: john@jjmaloney.co.uk www.jjmaloney.co.uk
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