Capital allowance changes could cause purchasers to lose tax reliefs, says expert

From April 2014 capital allowances will only be available to a purchaser of a building containing plant and machinery if the past owner has 'pooled' the relevant expenditure for capital allowance purposes in a chargeable period when it owned the property.

Capital allowances are valuable tax reliefs available in respect of expenditure on plant and machinery. This includes plant and machinery that is a 'fixture' or part of a building, such as lifts, air conditioning, heating and sanitary ware. Allowances are available at 8% on plant and machinery that is designated as an 'integral feature' of a building, such as lifts and air conditioning, but at 18% on other plant and machinery, such as sanitary ware and kitchen equipment. In some cases allowances can be available at 100% for the original purchaser of designated environmentally beneficial technologies.

Where a building containing qualifying plant and machinery is purchased, capital allowances will usually be available to the purchaser. The amount of allowances available will depend upon the price paid by the purchaser and the value agreed between the seller and the purchaser for the fixtures.

From April 2014, a seller will have to 'pool' its expenditure on plant and machinery in a chargeable period when it owns the building in order for the allowances to be passed on to the purchaser. Pooling means adding the expenditure to the seller's pool of expenditure qualifying for capital allowances, although the seller does not have to actually claim allowances.

The pooling requirement will only apply to a seller who was entitled to claim capital allowances and not to a non taxpayer such as a charity or pension fund or to a seller holding property as a trading asset.

John Christian warned that purchasers will need to take particular care if the seller has not claimed allowances.

"If the seller has not claimed allowances but was entitled to, the purchaser 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 (and owned the building at some time after April 2014) would have had to have pooled the expenditure in order for the allowances to be available to a subsequent purchaser." he said. 

"Purchasers will 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. Purchasers will lose out on valuable allowances if they don’t think about the capital allowance position before a sale ", Christian said.

The pooling rule will apply to property, other than new buildings, acquired by corporate taxpayers on or after 1 April 2014 and for income taxpayers on property which is acquired on or after 6 April 2014.

This new pooling requirement will be in addition to the fixed value or election requirement that has applied for property acquired since April 2012 and must also be satisfied if a purchaser of 'second-hand' fixtures is to obtain allowances.

The seller and purchaser must make an election within two years from the date of completion setting out the value attributed to the fixtures, or, if they cannot agree, apply to the Tax Tribunal for this value to be determined. The election is made under section 198 Capital Allowances Act 2001 or section 199 in the case of the grant of a lease.

If the election is not made, or a direction from the Tax Tribunal applied for within the two year period, the purchaser is not able to claim capital allowances in respect of the plant and machinery acquired on the property purchase. Subsequent purchasers are also prohibited from obtaining allowances.

If an election is made, the seller will be required to bring the value in the election into account as a disposal value in its capital allowance computation, and the purchaser should be able to claim allowances on this amount.

Although an election can be made when a non-taxpayer or property trader buys a property from someone entitled to claim allowances, if an election was not made, the fixed value requirement can be satisfied by obtaining a written statement from the non taxpayer or trader, stating that an election was not made and can no longer be made and a written statement from the person who sold the building to the non-taxpayer or trader showing the disposal value that it brought in.

John Christian said that, although it is helpful that the rules cater for this situation, "in reality it is going to be very difficult to obtain this kind of statement a number of years in the future, when the previous owners have no reason to co-operate".

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