Buying a commercial property?
If you are buying a commercial property, you may be able to claim capital allowances on certain fixtures, which are treated as ‘Plant and Machinery’ in the tax legislation. This could help to significantly reduce your corporation tax liability in future years.
Plant and Machinery likely to be included in the property
Plant and Machinery can include features such as central heating systems, air conditioning and ventilation units, fitted kitchens, sanitary equipment (such as baths, wash basins and toilet suites), lifts, hot and cold water systems, electric lighting and power systems. This can represent up to around 15% of the total property value and, in some cases, even more.
Conditions to make a claim
You need to be aware that there are two main conditions which need to be met before a claim for capital allowances on a commercial property can be made:
- The seller of the property must have already brought the cost of these fixtures in to their own capital allowance pool (this is known as the ‘pooling’ requirement); and
- Both the seller and the purchaser make a joint election, within two years of the purchase, which agrees the value allocated to these fixtures (‘s198’ election). This amount is restricted to the costs incurred and included in their capital allowances pool by the seller.
If the above requirements have not been met, the buyer will be prevented from making a capital allowance claim in respect of the seller’s qualifying expenditure on fixtures (nor will any future owner of these fixtures be able to make a claim).
What to do
If your solicitor is using the Commercial Property Standard Enquiries form during the purchase process, then this should clarify the amount that the seller has included in their capital allowance claim. If no claim has been made, then the seller is asked if they would be willing to make a claim. If this standard form is not used, you need to ensure that your solicitor obtains this information.
Having obtained the details, you will be in a position to negotiate the amount that will be treated as Plant and Machinery in the purchase document. It is often to the seller’s advantage to limit this amount, and the final agreement may depend on whether it is a buyers or a seller’s market.
Please remember that although this amount can be agreed up to two years after the purchase, there is rarely any compelling reason for the seller to do this once a sale has been agreed. (The seller will have to bring in a disposal value into their capital allowances pool, even if the purchaser has been unable to make a capital allowance claim).
If the purchaser and seller are unable to come to an agreement on the value of the fixtures included in the sale, then an application can be made to a tax tribunal to make a just and reasonable apportionment.
The process can be more complicated if the building being purchased was either built or last sold before April 2008. Prior to this date cold water systems and standard electrical and lighting systems did not qualify for capital allowances, so the owner would have been unable to claim tax relief on such items. However, the ‘Integral Features’ rules introduced in April 2008 allow the current purchaser to claim allowances for these features on an apportionment basis.
Also, there are special tax rules applying to charities, insofar as they are not usually eligible to claim capital allowances. Consequently, if the seller is a charity, it is likely that capital allowances on the qualifying Plant and Machinery have not been claimed; however the purchaser may still be able to benefit.
There are many matters to consider when buying or selling a commercial property, some of which will include capital allowance issues mentioned above, as well as VAT and Stamp Duty implications, funding and the cost of potential alternatives.
If you would like to find out more about capital allowances or to discuss any potential sale or purchase of a commercial property, please contact either Anne-Maree Dunn, a Tax Partner at WMT, or Victoria Nicoll, a Corporate Tax Director who will be happy to help with the process.