Capital allowances on commercial property: a buyer’s guide

When you buy a commercial building, the agreed price covers more than land and bricks. It may include heating, lighting, lifts, alarms and other fixtures. Some of these assets could qualify for tax relief.

That relief doesn’t pass automatically with the legal title to the property. Your entitlement may depend on the previous owner’s tax treatment and the terms you agree before completion.

For that reason, it’s wise to investigate capital allowances on commercial property before exchanging contracts. Once the sale has completed, your options may be much narrower.

What can a commercial property buyer claim for?

Capital allowances reduce the profit on which a business pays tax. They apply to certain long-term assets bought for business use.

Land and most of the building itself don’t qualify for plant and machinery allowances. Certain fixtures can. These include:

• Electrical and lighting systems
• Cold water systems
• Heating and hot water systems
• Ventilation and air conditioning
• Lifts and escalators
• External solar shading
• Fire alarms, CCTV and sprinklers
• Fitted kitchens and bathroom suites

HMRC classes heating, lighting, lifts and several other building systems as integral features. This distinction affects how quickly you receive the relief when you can’t deduct the full cost immediately.

You may also get separate tax relief on certain construction and renovation costs through the structures and buildings allowance. However, this doesn’t cover land or costs that already qualify as plant and machinery.

Can you claim the whole cost at once?

Once you know which fixtures qualify, the next question is how quickly you can claim the tax relief.

The Annual Investment Allowance, usually shortened to AIA, lets most businesses deduct the full qualifying amount in the year they spend the money. Otherwise, they may have to claim it gradually over several years.

Suppose you’re buying an office for £2 million. After reviewing the property and its tax history, your advisers establish that £150,000 of the price relates to qualifying fixtures.

If you have enough AIA available, you may be able to deduct the full £150,000 from your taxable profits that year.

That doesn’t mean you receive a £150,000 refund. The actual tax saving depends on your profits and tax rate.

A business can normally use AIA for up to £1 million of qualifying spending each year. Businesses with several companies under the same ownership may have to divide that £1 million between them.

If you can’t use AIA, you can usually deduct part of the cost each year instead. HMRC calls these annual deductions writing-down allowances.

Most qualifying equipment currently receives a deduction equal to 14% of the amount left to claim. Integral features, such as heating and lighting systems, receive 6%. HMRC publishes the current rates.

The structures and buildings allowance is separate. Where it applies, the annual deduction is generally 3% of the qualifying construction cost.

You may also have heard of full expensing, which lets companies deduct the entire cost of certain assets immediately. It won’t normally cover fixtures acquired with a second-hand building because those assets must be new and unused.

The seller’s claim history matters

Buying a building doesn’t give you a fresh claim based on the current value of every fixture.

Where the seller was entitled to capital allowances, the buyer will generally need two conditions to be met:

• The seller must have recorded the relevant expenditure in its capital allowance calculations
• The value passed to the buyer must have been formally fixed

HMRC refers to the first step as pooling. In simple terms, the seller places the qualifying cost into the appropriate tax account, known as a pool.

The former owner needn’t have claimed annual deductions from that pool. However, they must have recorded the expenditure while treated as owning the fixtures.

HMRC’s rules for fixtures when ownership changes explain these conditions.

This leads to a common and costly misunderstanding.

“No capital allowances have been claimed” doesn’t automatically mean that the buyer can claim instead. If the previous owner should have pooled the expenditure but failed to do so, the relief may be unavailable to every later owner.

What is a Section 198 election?

A commercial property is usually sold for one overall price. That price covers the land, building and fixtures inside it.

A Section 198 election is a joint tax agreement between the seller and buyer. It states how much of the total price they have allocated to fixtures that qualify for capital allowances.

That figure matters to both parties. The seller uses it when dealing with its previous allowances. The buyer uses the same amount as the starting point for its own deduction.

For example, an election might state that £150,000 of the purchase price relates to qualifying heating, lighting and electrical systems. The buyer can then base its claim on that amount, subject to the other rules.

Both parties must make the election jointly in writing. It should include:

• The amount allocated to the fixtures
• The names of both parties
• Each party’s Unique Taxpayer Reference, or confirmation that they don’t have one
• Enough information to identify the property and fixtures
• Details of the ownership or lease being acquired

Once made, the election can’t be changed.

Nor can the parties simply choose any figure. Broadly, the amount can’t exceed what the seller was able to claim or the price paid for the fixtures.

HMRC provides full details of the Section 198 election procedure.

A Section 198 election is the usual document. In some less common cases, the buyer will need different evidence, such as a written disposal-value statement. Your tax adviser should establish which rules apply.

Why does a £1 Section 198 election matter?

Let’s return to the £2 million office.

A specialist identifies fixtures that could support a £150,000 claim, subject to the seller’s records and the legal limits. However, the seller proposes a Section 198 election that gives those fixtures a tax value of just £1.

If you sign it, your future claim for the affected items will normally be based on £1. The specialist’s calculations won’t override the amount agreed in a valid election.

A low figure may suit the seller because it can reduce the amount entering its tax calculation. As the buyer, you will usually want to preserve as much qualifying expenditure as the evidence and legal limits allow.

That gives both parties different interests, so resolve the figure while you are still negotiating the sale terms.

How long do you have to make a Section 198 election?

The normal deadline is two years from the date you acquire the property.

If you and the seller can’t agree, either party can ask the First-tier Tribunal to decide. This is an independent tax tribunal, and the application must also normally begin within two years.

Missing the deadline can remove your right to claim. In some cases, HMRC will treat the value of the affected fixtures as nil if there is no valid election or tribunal application.

Two years may sound generous. It is less useful when the former owner has stopped replying to you or no longer has the records.

What should you check before buying?

Ask your tax adviser and solicitor to establish:

• Whether the seller was entitled to claim capital allowances
• Whether the seller recorded the fixture costs in its tax calculations
• What relief has already been claimed
• Whether earlier elections, reports or surveys exist
• What figure the seller proposes for the Section 198 election
• Whether a structures and buildings allowance statement is available
• What help the sale contract requires from each party

A tax specialist can identify the fixtures and calculate the amount that may qualify. Your solicitor can then make sure the contract and election reflect what has been agreed.

Don’t assume this will happen automatically. Give someone clear responsibility for it.

What if the seller couldn’t claim capital allowances?

Not every seller can claim this type of relief. A charity or another tax-exempt organisation may be unable to do so, for example.

In that situation, the buyer may need to divide the purchase price fairly between the land, building and qualifying fixtures. Tax advisers call this a “just and reasonable apportionment”.

Earlier ownership still matters. A previous owner may have claimed allowances or signed documents that limit what is now available.

“No previous claim” is therefore not a complete answer. You need to know why the seller didn’t claim and what happened during earlier sales.

Can you claim capital allowances on commercial property after completion?

Possibly. The answer depends partly on when you bought the property.

For companies, the fixed-value rules generally apply from 1st April 2012. The additional pooling rule generally applies from 1st April 2014.

For individuals and partnerships, the corresponding dates are 6th April 2012 and 6th April 2014. HMRC explains the commencement of the current fixtures rules.

If you bought before these dates, the newer requirements may not prevent a claim. You will still need evidence of what you acquired and details of any previous allowances.

For a later purchase, your adviser must check whether the seller dealt with the fixture costs correctly. They must also establish whether the required election or other document was completed in time.

Money spent on later renovations or replacement equipment should be considered separately. Those costs may produce a new entitlement even if the original purchase does not.

Completion doesn’t always mean you are too late. It does mean the transaction needs checking before anyone promises a result.

Get the position checked

THP can investigate the building’s tax history, review the purchase documents and arrange a specialist survey where necessary. We can then calculate the available relief and help your solicitor record the agreed position correctly.

If you’re buying, speak to us before exchange. Already completed? We can check whether you have any unclaimed capital allowances relating to your commercial property.

This article provides general information only. Capital allowance claims depend on the taxpayer, property and transaction history. Rates and rules may also change, so take advice before making a claim.