Capital Allowances and tax relief have a lot of questions surrounding the subject. Gathered below are our Top 10 FAQ’s that should help answer those questions.
Q1. “Can capital allowances be claimed on both freehold and leasehold properties?”
Claims can be made for both freehold and long leasehold interests. Short leases, with no upfront premium paid, are not eligible for a capital allowances claim as the fixed plant remains under the ownership of the landlord. However, in this scenario capital allowances can still be claimed on alterations made to the property as tenants.
Q2. “If the client has built the property himself many years ago and has no records of the build cost, how do we identify the costs on which to claim capital allowances?”
It is not essential for the client to provide records/invoices relating to the construction expenditure, but if they are available we will request sight of them. Accounts and tax computations from the period of construction can often provide the requisite information, together with a conversation with the accountant that acted at the time. The land registry is often able to provide evidence of the price paid for land and this provides a basis from which to calculate the construction costs.
Q3. “Can AIA be used against this type of capital allowances claim, or only WDA 8% or 18%?”
Yes, the Annual Investment Allowance can be claimed on this type of expenditure, providing that the expenditure took place within a tax return that remains open for amendment. For a retrospective claim on historic expenditure, the allowances can be entered into the pools for the earliest year which remains open for amendment.
Q4. “For accounting purposes where does the cost come from if you don’t reduce the cost for capital gains?”
The cost that is to be apportioned for capital allowances purposes will be the relevant purchase price (including stamp duty paid) or, in the case of refurbishment/extensions, the total cost that has been capitalised and left unclaimed. The introduction of capital allowances will not affect the base cost for Capital Gains Tax purposes. The acquisition of land also contains the building attached to the land and the fixtures attached to the building. There is a distinction to be drawn between the fixtures & fittings, (which are separate items to the building and are allocated separately in the sale & purchase agreement along with goodwill) and fixed plant & machinery (which is attached to the building). The fixed plant is not removed from the building and therefore not allocated separately in the accounts. The introduction of the capital allowances into the pool, is therefore a tax concern and not an accounting consideration, i.e. it is not a case of reducing the cost for the freehold/leasehold property and increasing the fixtures & fittings. The accounts are not amended; the only change is to the pools where the capital allowances are introduced.
Q5. “Do you have to wait until you sell the building before you can claim?”
Absolutely not, and we would encourage that owners make a claim at the earliest opportunity in order to benefit from the tax relief available. Should the building be sold at a later date then the balance of the claim can be retained or passed to the new owner.
Q6. “How exactly does the two year time limit apply? Is there no possibility of a belated claim, and if so is that at the end of this two year time limit?”
In order to fulfil the mandatory pooling and fixed value requirements, the past owner must record the pooling of any available capital allowances and dispose of them in the year of disposal. This can only be completed as long as the vendor’s tax return for the year of disposal remains open for amendment. A company has two years from the end of its chargeable period in which to make an amendment. After this time it can no longer pool/dispose of the allowances. The s198 election, which is generally used to fulfil the fixed value requirement, must be made within two years from the date that the purchaser acquires their relevant interest in the property, as outlined in S201 CAA 2001. This applies for purchases that took place post-March 2014 and where the two requirements referred to apply. If the property was purchased prior to this date, or the requirements do not apply (e.g. purchase from non-taxpaying entity), then the two year time limit will not apply.
Q7. “Can you briefly explain how a claim for capital allowances can be made for purchases pre April 2014?”
The first stage in any claim is to conduct the necessary due diligence. This includes reviewing purchase documentation to confirm the extent of any former claims back to 24th July 1996. This often involves making contact with former owners to obtain details of their tax treatment. Should there be scope to proceed with a claim, a specialist surveyor will need to visit the property and conduct an inspection. Using the surveyor’s report and information gathered during the due diligence phase will then allow a ‘just and reasonable’ apportionment of costs to be made and a value placed on the qualifying plant in the property. The claim for additional allowances can be entered into the earliest tax return which remains open for amendment under the standard self-assessment rules.
Q8. “If an election is made for capital allowances between seller and buyer, but the seller bought the building before 2008, can integral features now be claimed by the buyer even though they are not on the election? Can this then be claimed within AIA in the year of purchase of the building by the current buyer?”
Yes, integral features that were not claimable (such as general lighting and cold water systems) prior to April 2008 can be claimed by the buyer. As these items would not have been subject to prior claims, such features would not be included within the mandatory pooling and may be included within AIA by the buyer in the year of purchase.
Q9. “If a property was purchased in May 2013 and no election was made, has the opportunity to claim capital allowances now passed?”
As long as it can be ascertained that the vendor did not claim capital allowances on the fixed plant and machinery, and therefore that no disposal value will be required to be brought into account, the fixed value requirement will not apply. In this situation a claim for capital allowances can still be made by the new owner (crucially this purchase was prior to the introduction of the mandatory pooling requirement in April 2014).
Q10. “If the building has previously been the subject of a S198 claim, is the claim on a subsequent purchase restricted by reference to the value elected in that previous transaction?”
An s198 election is irrevocable and binding to all future owners of the property. It is worth reviewing the election and identifying which items of plant are included. It is quite common to find an election that was entered into prior to April 2008 and then simply passed on to future owners. In that situation a claim could still be made on items of plant & machinery which were not deemed to qualify for capital allowances prior at the time, but now qualify following Finance Act 2008. These include general lighting and cold water systems amongst other assets. Additionally if a complete refurbishment has taken place since the election, then the items of plant replaced during the works would not be subject to the original election.
Do You Have Unanswered Questions?