Capital Allowances Election

Buyers and sellers have opposing motives when transferring Capital Allowances associated with the embedded fixtures & fittings. How can you be sure that you’re making the best deal? Learn about capital allowances, the Section 198 Election process, and special situations.

Capital allowances on commercial property embedded fixtures & fittings offer tax relief.

Embedded Fixtures & Fittings (not Chattels)

When purchasing commercial real estate, fixtures should be valued for capital allowances. On occasions, these can overlap with Plant & Machinery or Fixtures & Fittings on the Balance Sheet.

This often leads to confusion so it’s important you have a thorough survey of the site to identify qualifying items.

This ensures the transaction satisfies legislation and significant tax relief isn’t lost!

Signing a legal document
A person signing a document

Commercial Property Tax Relief

Tax relief can often be available up to a third of the sale price.

A seller will no longer be able to claim further allowances on the embedded fixtures & fittings transferred to the buyer.

Sellers would prefer not to transfer these Capital Allowances. If the negotiated value was £1, the buyer would not be able to claim any allowances on the embedded fixtures & fittings the £1 refers to. The seller keeps the Capital Allowances even after the sale of the property.

Surprisingly, buyers should first investigate whether the seller claimed all the allowances possible, as in most cases they haven’t.

If a seller has not claimed allowances, the first step is calculating the value of Capital Allowances.

The parties must complete Section 198 Elections within two years of the completion date, with each entity filing a copy of the election with their tax return.

Once you file an election, you can’t reverse it. So get it right!

commercial buildings

Who Can Claim Allowances?

UK taxpayers engaged in a qualifying activity can claim capital allowances on property. These include:

  • Companies
  • Sole traders and partnerships
  • Commercial landlords
  • Owners of commercial property
  • Furnished holiday property in UKK/EEA

Preservation of Allowances

Some sellers are not eligible for capital allowances. Exclusions apply to pension funds, charities, and the government. Owners of residential dwellings also don’t get allowances.

Buyers need to find out the seller’s position as early as possible. To relieve their tax burden, buyers will need to take steps to preserve or utilise the allowances. Otherwise, they will be lost and later buyers won’t be able to claim the allowances either.

Even non-taxpayers should pay attention to the capital allowance position. It may not apply to them immediately but future buyers will take this position into consideration and it may enhance any future value when selling the property.

Preservation Requirements

Allowances can be preserved even if the current owner isn’t entitled to them. All buyers should make Section 198 Elections. Doing so meets the fixed value requirement and owners can then pass on allowances when reselling the property.

Modern apartment building

Section 198 Election Requirements

The required information on a Section 198 Election is as follows:

  • The property address
  • Amount fixed by the election
  • Name of each person making the election
  • Specific information to identify the embedded fixtures & fittings
  • Details of the legal interest gained by the buyer (eg. freehold)
  • Tax district references of each party making the election

The amount fixed by the election is the value of the capital allowances transferred. The information provided can’t be vague. A phrase like “all qualifying embedded fixtures & fittings” would make the election invalid.

Although HMRC accepts a degree of amalgamation of items, best practice would be to attach an inventory list of each fixture and fitting to support the values attributed.

As well as satisfying the legislation, this also makes it clear upon which items allowances have been claimed.

Male working out sums on a calculator

Value Negotiation Conflicts

If the parties can’t agree on the value of the embedded fixtures & fittings (not Chattels), they can make an application to the First-Tier Tribunal. They must make this request within two years of the completion of the sale. The tribunal will extend the normal deadline to allow enough time to make their decision.

Benefit From Your Elections

If you recently bought a commercial property, did you look into capital allowances? If not, you’re probably sitting on significant tax savings that are at risk of being lost. Why pay more tax if you don’t have to?

Contact Capital Allowance Review Service, and get a free initial assessment! There are no upfront costs. We deal with HMRC so you don’t have to.

Let us analyse your tax position and handle your Section 198 Election today!

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