What does a Section 198 Election do?
As stated by the CAA 2001, the way in which the seller and buyer agree to the apportionment of the capital allowance for fixtures and fittings in a property being sold is a Section 198 Election. They are a simple way for the seller and buyer to meet the fixed value requirements of the CAA2001 which have been applicable to sellers, whether they have made a capital allowance claim or not since April 2014.
When do Section 198 Elections need to be completed?
S198 Elections must be completed within 2 years of the completion date, or any potential allowances available will most likely be lost forever
Legal Documents
If you are buying or selling a commercial property, it is crucial that we review the prepared legal documents.
These include:
- Contracts & Sales Agreements. We ensure that the right provisions are inserted and tax savings are secured. Legislation changes in 2014 that impacted property transactions are dramatically misunderstood resulting in significant tax savings being lost.
You must include a copy of the election with each person’s tax return for the first period that’s affected by it. This will normally be the period in which the disposal or purchase takes place.
When a partnership, or individual, makes an election, the election must accompany the partnership or individual’s tax return.
Section 198 Elections are common practice for many commercial property transactions.
Need more guidance on Section 198 Election?
A valid section 198 Election should show the following details:
The amount fixed by the election in relation to the property fixtures:
The amount fixed is the value of capital allowances being transferred from seller to buyer. If the fixed value is £1 for both Main (General) & Integral Features (Special Rate) Pools, this means the buyer is being passed at the minimum value. This may either be because all allowances have been previously claimed by the vendor, or it may be that the vendor wishes to keep all available allowances and retain any available tax savings.
It should also be noted that there will be occasions when the value of the Special Rate pool is not applicable, and this should be noted as such. An example of this can be where the vendor purchased the property prior to 1 April 2008, when the Integral Features legislation came about. In that instance, the vendor would not have been able to claim Integral Features on the purchase of the property, only on any improvements after 1 April 2008. This can sometimes open the door for the buyer to make a claim for Integral Features.
The name of each person making the election
This simply requires the seller & buyer’s details.
Enough information to identify the fixtures and the relevant land
This is where the validity of a Section 198 Election hinges. Where the information describing the plant & machinery is simply too vague and does not clearly set out what items have been attributed to the fixed amount (noted above), this invalids the election. An example is: “all Plant & Machinery”.
When completing a Section 198 Election, we attach a list (inventory) listing all the property-embedded fixtures & fittings that the seller has/is able to claim. It’s important to understand that the seller may not have been able to claim items that the buyer now can so its crucial items are clearly set out.
HMRC accepts a degree of aggregation in relation to the items included in the Section 198 election, however, you must state the amount allocated to the fixture when you make the election, and there must be enough detail given so as to make the tax position clear.
Details of the interest gained by (or the lease granted to) the buyer
An example could be “Freehold”.
The tax district references of each person making the election
You will need to insert the tax district references of the buyer and seller making the election.
Frequently Asked Questions About Section 198 Elections
What is a Section 198 Election?
A Section 198 Election is a legal agreement made under the Capital Allowances Act 2001, governing how capital allowances on fixtures and fittings are handled in commercial property transactions in the UK. It allows the buyer and seller to jointly fix the value of plant and machinery fixtures embedded within the property, ensuring the buyer can successfully claim capital allowances. Without a valid election, the buyer’s right to claim those allowances could be permanently lost.
When is a Section 198 Election required?
A Section 198 Election is required on commercial property transactions completing after April 2014 where the seller has pooled expenditure on embedded fixtures and fittings. It satisfies the fixed value requirement of the Capital Allowances Act 2001. Whilst not required on every transaction, it should be considered as standard practice in all commercial property sales and purchases where embedded plant and machinery is present.
What is the deadline for submitting a Section 198 Election?
Both the buyer and seller have two years from the date of completion to jointly sign and submit a valid Section 198 Election to HMRC. Missing this deadline means the opportunity to fix the capital allowances value is permanently lost. Capital Allowance Review Service recommends raising the election at the pre-contract stage rather than treating it as an afterthought after completion.
What happens if you do not complete a Section 198 Election?
Without a valid Section 198 Election, the buyer may be unable to claim capital allowances on the embedded plant and machinery fixtures within the property. The value of those allowances effectively defaults to zero, permanently removing a tax relief that could be worth tens of thousands of pounds. Future buyers of the same property may also be unable to claim, making it an issue that affects the long-term tax position of the asset.
What is a £1 Section 198 Election and is it bad for buyers?
A £1 Section 198 Election fixes the value of the capital allowances being transferred at just £1, meaning virtually no allowances pass from seller to buyer. This most commonly occurs when standard templates are used without proper review of the underlying capital allowance position. For buyers, a £1 election is highly unfavourable and should be challenged before signing. Capital Allowance Review Service regularly identifies and challenges incorrectly valued elections during commercial property transactions, recovering allowances that template-based approaches would have lost.
Can you reverse a Section 198 Election once it has been signed?
In almost all circumstances, no. Once a Section 198 Election has been signed by both parties and submitted to HMRC, it is legally binding and permanent for tax purposes. Both parties will have filed their tax returns on the basis of the election, and HMRC requires certainty to prevent disputes and double claims. This is why it is critical to ensure the election accurately reflects the available capital allowances before signing.
What must a Section 198 Election include to be valid?
A valid Section 198 Election must include the names and addresses of both buyer and seller, details of the property and the legal interest being transferred, the tax district references of each party, and the value fixed for both the main pool and special rate pool where applicable. Critically, the description of qualifying fixtures must be sufficiently detailed. Using vague language such as “all plant and machinery” renders the election invalid under HMRC rules. Capital Allowance Review Service attaches a full inventory of qualifying fixtures and fittings to every election it prepares, ensuring no level of uncertainty.
Does my solicitor handle the Section 198 Election?
Solicitors handle the legal aspects of a commercial property transaction but are not always equipped to identify and value the qualifying plant and machinery fixtures within the property fabric. A Section 198 Election is both a legal document and a tax document, and errors in the capital allowances element can permanently restrict what the buyer can claim. Capital Allowance Review Service works alongside solicitors and accountants to ensure the election accurately reflects the available allowances and satisfies the requirements of the Capital Allowances Act 2001.
Can CARS review an existing Section 198 Election that may be invalid?
Yes. Capital Allowance Review Service regularly reviews elections that have already been completed, identifying whether they are valid, whether the fixed values are appropriate, and whether allowances have been incorrectly restricted. If you have concerns about a Section 198 Election that has already been signed, contact our team for a complimentary initial review.
Get in touch
Do you need to complete a Section 198 election or would like a Section 198 reviewing? Our expert team will be able to help guide you through the process.