Capital Allowances on Buildings

In The Hot Seat With Sara Crowther, Crowther Associates Chartered Accountants

When a business calculates the profits on which it must pay tax it cannot deduct capital expenditure.  One exception to this rule is capital allowances.  These allow a business to write off their expenditure on certain capital assets against their taxable profits, reducing their tax liabilities.

Some businesses fail to maximise the capital allowances they can claim and pay too much tax.  This is particularly the case in relation to the capital allowances that are available on commercial buildings.

Tax relief can be claimed on the fixtures of a building including electrical systems, heating systems, air conditioning, alarms, kitchens and sanitaryware.  In industrial units these items can represent 5% to 10% of the purchase price, in offices from 10% to 30% of the purchase price and for hotels as much as 45% of the purchase price.

When a business purchases a property from a developer, it is likely that they will be able to make an unrestricted claim for capital allowances on a proportion of the purchase price.  The amount that can be claimed will be identified by a specialist surveyor.

The rules for claiming capital allowances on the sale or purchase of a “second-hand” building have changed substantially in the last few years.  The new rules mean that in order for capital allowances to be passed on when a building is sold, an election must be entered into which allocates a proportion of the consideration as relating to the fixtures.  Capital allowances can then be claimed by the buyer on the amount prescribed in the election. 

If an election is not entered into then capital allowances can be lost on the building forever, with the potential for future valuation issues in relation to the building.  This election must be agreed within two years of the sale and there are a number of rules to consider before this is entered.  We recommend that all sellers and purchasers take advice to ensure that they maximise their tax position when entering into an election during a commercial property transaction.

The rules relating to elections do not apply for businesses that acquired a second-hand property prior to 1 April 2012.  This means that businesses that purchased property before this date and have not claimed any capital allowances may still be able to claim the tax relief. 

In the event that some capital allowances have been claimed, the claim may be far lower than the business is actually entitled to make and so further tax relief could be due. We recommend that all property owners review the capital allowance position in relation to commercial properties in their portfolio.