Can You Reverse a Section 198 Election After a Property Sale?

What Is a Section 198 Election?

To property developers and investors, the Section 198 Election is very important. It is a joint election between the buyer and seller of a commercial property that fixes the transfer value of qualifying fixtures for capital allowances purposes as a tax agreement made under the Capital Allowances Act 2001.

Fixtures are items of plant and machinery that are permanently installed in a building, such as:

• Heating and air conditioning systems
• Lighting installations
• Lifts and escalators
• Security systems
• Electrical wiring
• Sanitary fittings

The Section 198 Election sets out how much of the property sale price is attributable to these fixtures. The value agreed can be anywhere between £1 and the seller’s original cost of the fixtures.

Key points about a Section 198 Election

• It only applies if the seller has pooled the expenditure (i.e., included the fixtures in their capital allowances claims).
• The election must be in writing, signed by both buyer and seller.
• HMRC must receive the Section 198 Election within two years of the property sale.
• Once validly made, the election is legally binding on both parties.

Why Do Section 198 Elections Exist?

Without Section 198 Elections, both buyer and seller could potentially try to claim allowances on the same fixtures, leading to “double claims.” Alternatively, neither party might be able to claim, wasting available tax relief.

The election provides:

1. Certainty – both parties know who gets the allowances.
2. Fairness – the seller cannot claim allowances twice, and the buyer cannot claim more than is available.
3. Administrative efficiency – HMRC has a clear, fixed value to refer to if queried.

Example: How a Section 198 Election Works

Let’s consider an example.

• A company sells an office building for £2,000,000.
• Within that building, there are £250,000 of qualifying fixtures, calculated after key due diligence with a site survey completed (air conditioning, lifts, wiring, etc.).
• Although the seller could have, they have not already claimed any of the £250,000 allowances on these fixtures in the past.

The buyer and seller must agree on how to allocate the value of these fixtures. They have several options:

1. Election at £1 – The buyer gets no allowances. The seller retains the ability to claim the capital allowance for a limited period after the disposal.
2. Election at £250,000 – The buyer can claim the full allowances going forward.
3. No election – In this case, this effectively leaves full control with the seller and restricts the buyer from claiming capital allowances against their purchase costs.

The agreed figure has real tax consequences. This is why the decision must be taken carefully.

The Legal Framework Around Reversals

The Section 198 Election derives its authority from the Capital Allowances Act 2001, Section 198. The Section 198 election reversal rules within the law are clear: once a valid election is made, it is conclusive.

HMRC guidance reinforces this. Elections are not subject to casual amendment or withdrawal. If parties could simply change their minds, the system would collapse into disputes and uncertainty.

The only real scope for challenge is if the election was never validly made in the first place, for example, if it was late, incomplete, or contained incorrect information.

The Reversal Dilemma

Why do parties sometimes want to reverse an election?

• The buyer discovers that by agreeing to a £1 election, they have lost out on substantial allowances.
• The seller realises that a high disposal value has triggered an unexpected balancing charge.
• Both parties realise later that the election was drafted incorrectly.

Unfortunately, in most cases, regret does not provide grounds for reversal. This highlights the importance of getting it right at the start.

Limited Circumstances Where an Election May Be Challenged

Although reversals are rare, there are some situations where a Section 198 Election might be disputed:

1. Procedural Errors
   • Election not signed by both parties.
   • Insufficient detail and therefore not satisfying legislation, resulting in an invalid election.
   • Election submitted after the two-year deadline.
   • Wrong property or party details included.
     In these cases, HMRC may deem the election invalid.
2. Mistake of Fact or Law
   • For example, if the seller had never actually pooled the fixtures expenditure, then a Section 198 Election should not have been made.
3. Tribunal Determination
   • If no election is made within two years, either party can apply to the Tribunal.
   • But once a valid election is signed, the Tribunal has no power to override it.
4. Invalid Consideration
   • If the election sets a value outside the permitted range (e.g., higher than the original cost), it may not be valid.

Outside these limited circumstances, a signed Section 198 Election is binding.

Common Misconceptions About Section 198 Elections

1. “It’s optional.”
   Not true. If the seller has pooled expenditure, an election or Tribunal determination is required.
2. “It covers land and buildings.”
   Yes, the election only applies to embedded fixtures with Land & Buildings costs, not moveable Plant & Machinery or Fixtures & Fittings.
3. “A £1 election means the fixtures are worth £1.”
   Wrong. The £1 simply fixes the tax value. The actual fixtures are worth far more.
4. “You can change it later.”
   Almost never. Once validly made, the election is binding.

Risks of Signing Without Advice

• Buyer’s risk losing allowances permanently if they agree to £1 without realising the impact.
• Seller’s risk unexpected balancing charges if they agree to a high value.
• Poorly drafted elections can be rejected by HMRC, creating uncertainty.

The sums at stake are often significant. For example, losing £250,000 of allowances could cost a buyer £62,500 in extra tax (at a 25% corporation tax rate). It could cost a landlord paying 45% tax on rental income £112,500!

How Section 198 Elections Fit into Wider Tax Planning

Elections are not made in isolation. They interact with:

• Section 187A pooling requirement – A seller cannot pass allowances to a buyer unless they have pooled them.
• Annual Investment Allowance (AIA) – Buyers may be able to claim AIA on newly acquired fixtures.
• Balancing charges – Sellers may face charges if disposal values are high.

These interactions can change the commercial terms of the deal.

What Happens If No Election Is Made?

If no Section 198 Election is signed within the two-year limit:

• Either party can apply to the First-tier Tribunal.
• The Tribunal will determine the disposal value based on evidence.
• This often leads to a worse outcome than negotiating an election.

For example, the Tribunal may set a disposal value much higher than the seller wanted, creating a large balancing charge. Or, it may set a value lower than the buyer hoped for, reducing future allowances.