Buying or selling commercial property from April 2014
New rules have been introduced by the Government in relation to a business that buys a commercial property. From April 2014 extra care will have to be taken if it still wishes to claim capital allowances on parts of its acquisition cost. A purchaser's ability to claim capital allowances will be dependent on the vendor's position and whether the vendor has made an appropriate claim.
What are capital allowances?
Capital allowances allow commercial property owners, including owners of certain furnished holiday lettings, to recover certain items of capital expenditure as a tax deduction and are a valuable tax relief. Not all property expenditure is capable of qualifying and the amounts of any deduction can vary significantly (typically ranging from 5% to 100%) depending on property type and use.
What are the new rules?
New rules come into force on the acquisition of a second hand commercial property on or after 1 or 6 April 2014 (for corporation and income tax purposes respectively) and are primarily aimed at purchasers. They strengthen a long established requirement for purchasers to understand who has incurred expenditure on the property and who has been entitled to claim or made a claim for allowances previously. Tax paying vendors of commercial property need to be aware that if they decide not to make a claim for plant and machinery allowances on fixtures and subsequently sell those fixtures after April 2014, a tax paying purchaser will lose out and will not be eligible to claim any allowances for expenditure where the vendor was entitled. This mandatory claim requirement on the vendor was introduced by the Government to protect HM Treasury from giving tax relief more than once on the same asset. The rule changes put beyond doubt the need to match any vendor's claim (or past owner if the vendor is a non-taxpayer) to the purchaser. The normal filing deadlines for making or amending a capital allowances claim are unaffected by the above rule change.
Provided a business owns the asset in the period the initial capital allowances claim is made, it should still be available. Technically, this may mean a vendor could make a claim in the period of sale if it had not done so before. It should however, be aware that any claim will still be open to enquiry by HM Revenue & Customs and the risk of any settlement may need to be reflected in the sale agreement.
Key points concerning the new rules:
- The rules apply to the acquisition of second hand commercial property on or after 1 or 6 April 2014
- If the vendor has not claimed capital allowances, the purchaser will be unable to claim allowances for expenditure where the vendor was entitled
- Claims should be considered in the sale agreement
Who is going to be most affected?
Owing to the potential loss of allowances for the purchaser, vendors are going to be under pressure to get capital allowances claims up to date before a property is sold. There are often legitimate reasons why businesses do not make claims or full use of their allowances, for example, their tax paying position versus the cost of paying a professional adviser to make the necessary claims.
What if the vendor was not eligible to claim capital allowances?
It is only situations where vendors are entitled to claim, but choose not to, that are relevant for the mandatory claim requirement. Purchasers that acquire property from non-taxpayers such as charities and exempt government bodies should not be restricted, although they may still be required to obtain evidence of a past owners claim. Similarly, buildings acquired from developers should not normally be caught and confirmation of the vendor's tax position should be obtained on sale.
Source - Grant Thornton