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. The legislation stipulates Property Capital Allowances should now be clearly documented creating 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?
- Complicating and delaying transactions.
- Exposes property advisors to negligence claims.
- A loss 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, Special Rate Pool or both. Following many reviews, we see these documents conflict with 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 4 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 (unless the Purchaser cannot use any Capital Allowances e.g. pension, charity, etc). 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?
As property transactions can differ so dramatically, the key challenge is understanding how to apply this legislation in a way that correctly reflects the transaction.
For those who continue to work with us now know the best way to tackle this is asking for our advice at the point that the transaction is in its ‘draft’ stages. This enables the correct approach to be applied prior to completion meaning legislation can be satisfied and clients wishes secured.
Our Car Dealership client transformed from a finance brokerage into a portfolio of complementary, best in class brands, products and services which are designed to put the customer first and help their partnerships grow. The property was acquired in 2012 and owned personally; new legislation applied to the transaction due to being post-April 2014 and the claim was based on…View case study
Capital Allowance Review Service offers free advice to support Accountants, Solicitors and Clients when disposing of 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. Contact us on 01782 916240 or email us.
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Our expert team are here to help answer any of your capital allowances questions or enquires you have about your commercial property.