Commercial property transactions post-April 2014, where the freehold is sold or acquired by parties that are liable for UK tax, are subject to a dramatic change in legislation.
Commercial property improvements and transactions pre April 2014 are not affected by this legislation.
Property Embedded Capital Allowances (not chattels) should be considered for all commercial property transactions. Legislation stipulates Property Capital Allowances should now be clearly documented creating standalone documents ensuring better transparency.
Two main changes:
- There is now a 2 year time restriction to complete and submit a valid Section 198 Election.
- Understanding the Vendors costs and the years in which the Vendors cost were incurred is vital. This information is crucial to determine how to apply the legislation, how to secure tax savings and how to clearly document the Property Embedded Capital Allowances.
How is this legalisation impacting transactions?
- Complications and delayed transactions.
- Exposes property advisors to negligence claims.
- Lose in tax savings.
Using standard Capital Allowance templates for CPSE.1 responses, Contract Clauses and Section 198 Elections simply doesn’t work. There are numerous factors that will impact how Legal Documents are prepared which would result in templates not making sense, not being required or not being valid.
CPSE.1 Section 32 specifically relates to Property Capital Allowances (not chattels). The responses to this section can determine what Contract Clause to insert. The Contract should relate to a valid S198 Election i.e. include Main Pool and Special Rate Pool or both. Following many reviews we see these documents conflict each other.
It’s important to remember that a Section 198 Election isn’t always required.
It’s also important to be aware that Special Rate Pool Plant & Machinery is not always required within a Purchase Contract or valid S198 Election.
We often see S198 Elections include movable equipment (chattels). Chattels should not form any part of the S198 Election. The election should clearly show what plant & machinery is integral to the property i.e. the immovable fixtures, fittings & features.
Since April 2014 we have seen a number of different methods all with the intention of satisfying what still feels like a new piece of legislation although it is now 3 years since it came into force. There are still many advisors both in the accounting and legal sectors that are simply unaware of the changes. This is not only causing complications but also exposing advisors to negligence claims in the event any allowances are lost.
A frequent misunderstanding:
A Section 198 Election for “all plant & machinery” for “£1” is a common template used. This is not correct and therefore means the election is invalid.
“all plant & machinery” – legislation stipulates that the election needs to provide sufficient detail so it is clear what plant & machinery has been attributed to the fixed value on the election.
Our method is to attach a supporting inventory itemising all the P&M ensuring no level of uncertainty.
“£1” – an Election for £1 simply means no allowances are being transferred from Vendor to Purchaser. When acting for the Purchaser an Election for £1 is not good. When acting for the Vendor, an Election for £1 maybe challenged by the Purchaser.
In most cases our review confirms that the Property Embedded Capital Allowances haven’t been claimed. It then becomes clear why there is confusion surrounding the S198 Election. If a claim hasn’t taken place, it’s impossible to create a valid S198 Election.
What is our best advice?
This legislation itself isn’t complicated. The challenge is understanding how to apply this legislation to many different property scenarios.
For those who continue to work with us now know the best way to tackle this, is knowing an expert and knowing when best to look for support.
Capital Allowance Review Service currently offer free advice to support Accountants, Solicitors and Clients when disposing or acquiring a commercial property. In order to give you the best chance in securing any available tax savings and settling a clear path to all those involved in the transaction, we encourage you to contact our experts at the point of contracts being drafted.
Property Cost £667,600
Accountant had already claimed £277,850
Capital Allowance Review Service highlighted an additional £134,941
Our expertise highlighted a further 20% over and above typical Accounting routines!
5 December 2023
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22 November 2023
Autumn Budget 2023: Changes to Capital AllowancesThe Autumn Budget of 2023 has arrived, and with it comes significant changes and developments the government has put in place. Chancellor Jeremy Hunt delivered the statement on Wednesday, 22 November 2023. For businesses and individuals alike, these adjustments in tax policies can have far-reaching implications.
Our expert team are here to help answer any of your capital allowances questions or enquires you have about your commercial property.