Out-Law / Your Daily Need-To-Know

Out-Law Guide 7 min. read

Capital allowances on UK property transactions

Under the UK tax system, a business which spends money on capital assets for use in its business cannot claim a tax deduction for that expenditure.

Instead, a tax relief called a capital allowance may be available for certain types of expenditure.

The aim of capital allowances is to give tax relief for the reduction in value of certain capital assets used by a business, by letting the business write off the cost of the assets over a number of years against the taxable income of the business.

Some buildings may qualify for new structure and buildings allowances. Even if allowances are not available in respect of the building itself, buildings will contain items of plant and machinery such as lifts, heating systems, air conditioning and sanitary fittings which may qualify for allowances.

Availability of capital allowances can be an important consideration on the sale or purchase of a commercial building.

Plant and machinery allowances

Writing down allowances are available in respect of expenditure on certain types of plant and machinery. Details of what constitutes plant and machinery can be found in HMRC guidance.

Writing-down allowances are annual allowances that a business can claim to reduce or 'write down' any remaining balance of capital expenditure on plant and machinery that the business has not already claimed a capital allowance for, referred to as a "pool" of "unrelieved" expenditure.

Writing down allowances are applied to the sum of the following:

  • any residual capital expenditure balances carried forward from previous years;
  • added to the balance of any new capital expenditure in the accounting period after you have claimed any other more advantageous allowances (such as the annual investment allowance – see below);
  • less the proceeds of equipment disposed of or sold.

There are two different rates of capital allowance – the main rate of 18% and the 'special rate' of 6%.

Most plant and machinery will fall within the main pool. However, certain assets in a building are designated as "integral features" and qualify for allowances at the lower special rate if expenditure was incurred in respect of them on or after 1 April 2008. The following are designated as integral features:

  • an electrical system (including a lighting system);
  • a cold water system;
  • a space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system;
  • a lift, an escalator or a moving walkway; and
  • external solar shading.

Certain other assets with a working life of over 25 years are designated as "long-life assets" and qualify for allowances at the special rate.

Availability of capital allowances can be an important consideration on the sale or purchase of a commercial building

There are special capital allowance rules for cars. There are also special rules which enable an election to be made in respect of assets with an expected useful life of less than 8 years (short life assets) which enable the full benefit of the allowances to be obtained more quickly.

From 1 April 2021 to 31 March 2023 a 130% ‘super-deduction’ is available for new plant and machinery that would otherwise have qualified for the 18% ‘main rate’ of capital allowances. Expenditure on ‘special rate’ assets that would otherwise have qualified for allowances at the lower rate of 6% qualifies for a 50% first-year allowance. Assets on which the super-deduction or the 50% allowance for special rate expenditure have been claimed are subject to an immediate balancing charge on disposal.

Annual investment allowance

Businesses can claim an annual investment allowance for capital expenditure incurred on most items of plant and machinery. The annual investment allowance gives 100% capital allowances on expenditure up to £200,000 a year. Businesses which are members of a group of companies only get one annual investment allowance for the whole group.

The annual investment allowance has been temporarily increased to £1 million until 31 March 2023.

Enhanced capital allowances

Enhanced capital allowances give 100% capital allowances on certain designated plant and machinery. 100% allowances were abolished from April 2020 on energy and water-saving technologies. They are currently only available on a restricted number of items including zero-emission goods vehicles and cars with low CO2 emissions.

Enterprise zone allowances and freeport tax sites

100% capital allowances used to be available (especially in the 1980s and 1990s) for expenditure on industrial buildings in designated 'enterprise zones'. This type of allowance in respect of the cost of the buildings is not available for any expenditure incurred from April 2011.

There are now over 40 new enterprise zones benefiting from business rates reductions and a simplified planning process. Businesses in some of these zones qualify for 100% capital allowances in respect of expenditure on plant and machinery. 100% allowances will not, however, be available in respect of expenditure on the cost of buildings themselves (other than on plant and machinery, such as a lift, which is a part of the building).

For more information about enterprise zones see the government's enterprise zone website.

100% allowances are also available in some designated freeport tax sites.

Industrial buildings allowances (IBAs)

Industrial buildings allowances (IBAs) used to provide capital allowances for construction costs of specific types of buildings used for a trade such as factories and offices. However, IBAs are no longer available.

Structure and buildings allowances (SBAs)

Structures and buildings allowances (SBAs) give tax relief on eligible construction costs incurred on or after 29 October 2018. The relief was given at 2% a year on a straight-line basis until April 2020, when it increased to 3%. Structures and buildings qualifying for SBAs include offices, retail and wholesale premises, walls, bridges, tunnels, factories and warehouses. Capital expenditure on renovations or conversions of existing commercial structures or buildings also qualifies. The allowance does not apply to dwellings or to expenditure on the land itself.

Business premises renovation allowance

Business premises renovation allowance (BPRA) was available before April 2017 and was designed to encourage conversion and renovation of empty business properties in specified "assisted areas". BPRA provided a 100% tax relief to property owners on money spent on conversion or renovation works on a building. It is no longer available.

Capital allowances on a property sale or purchase

When a property is sold, if the seller has been claiming capital allowances in respect of plant and machinery within the building which constitute fixtures for land law purposes, it will need to work out what part of the sale proceeds are attributable to the assets which qualified for allowances. This figure will need to be brought into the seller's capital allowance computations.

Similarly a buyer which is hoping to claim allowances in respect of plant and machinery in a building will need a figure on which to claim allowances.

The general position for working out the amount of sale proceeds of a building which relate to assets qualifying for allowances is to carry out a just and reasonable apportionment.

If the buyer is to be able to claim allowances in respect of machinery and plant in the property which constitutes a "fixture", tax legislation requires the parties to enter into an election (a 'section 198 election') to fix the value at whatever amount they choose, within certain parameters, or to apply to the Tax Tribunal for a value to be determined. It is normal to make the election at either tax written down value or at £1 per pool of assets.

Electing at tax written down value means the seller won’t suffer a clawback of any allowances already claimed, but will cease to be able to claim further allowances in respect of its expenditure on the assets. The buyer will be able to obtain allowances and effectively steps into the seller's shoes.

By contrast, an election at £1 means that the buyer will not be able to claim any allowances in respect of the acquisition of the building and the seller will continue to get the benefit of unclaimed allowances.

A buyer of a building is only able to obtain capital allowances if the seller has 'pooled' its expenditure on the fixtures for capital allowance purposes in a chargeable period when it owned the property. Pooling means adding the expenditure to the seller's capital allowance pool – although the seller does not have to have claimed a writing down allowance.

The pooling requirement is in addition to the requirement to have fixed the value of the fixtures by entering into a section 198 election or getting a determination from the Tax Tribunal.

The pooling requirement will not be an issue where the seller has been claiming all the allowances it was entitled to claim, as it will have already pooled the expenditure in order to claim the allowances. However, buyers will need to take particular care if the seller has not claimed allowances. Buyers may also want to investigate whether the seller has claimed all the allowances it could have claimed.

If the seller has not claimed all the allowances it could have claimed, the buyer will need to ensure that the seller agrees in the sale documentation to pool its expenditure. If the seller is not entitled to allowances, perhaps because it is a non-taxpayer such as a pension fund, the last owner of the property who was entitled to claim allowances would have had to have pooled the expenditure in order for the allowances to be available to a subsequent buyer. Buyers will therefore need to find out about the seller's capital allowance position as early as possible, so that the necessary steps can be taken to preserve the capital allowances. Otherwise, valuable allowances can effectively be lost and cannot be claimed by anyone.

It is important that non-taxpayers, such as pension funds, pay attention to the capital allowance position and obtain the necessary information when they buy properties, even though they themselves cannot claim allowances, so that they can preserve the value of the allowances for future buyers - and thereby increase the value of the property.

Capital allowances and leases

When a lease is granted, allowances in relation to the fixtures within the building will remain with the landlord unless the lease is granted at a premium and an election (a 'section 183 election') is made for the allowances to pass to the tenant. However, tenants will usually be able to claim allowances in respect of expenditure they have incurred on items qualifying for allowances as part of their fit out of the premises. Any contribution by the landlord to the fit out of the property needs to be carefully structured so as not to prejudice the availability of allowances for the tenant.

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