Warning for Property Advisors

28 January 2014

CBW Tax

A building contains fixtures which will attract capital allowances

• Available only on commercial property• But includes second hand• And sometimes lease premiums• Fixtures 18%• Integral features 8%• Enhanced allowances on new energy saving/environmentally

beneficial plant

CAA 2001, s 187A

• Applies where:• a) person acquires a (non-residential) building

which includes fixtures, and• b) a previous owner was entitled to claim

capital allowances on the fixtures

NB Any previous owner, not merely the vendor to the client

Change from 1 April 2014

• From 1 April 2014 a purchaser can claim capital allowances only if BOTH;

• a) the pooling requirement is satisfied, and

• b)the value of the fixtures is fixed within two years of the acquisition by either;

(i) an s 198/199 election (or certificate from an earlier owner), or(ii) an application to the FTT

Section 198 election

• As agreement as to the transfer value of the fixtures

• Made jointly between vendor and purchaser• Can agree any figure between nil and the vendor’s

‘cost’ of the fixtures• But vendor will pay extra if it exceeds his pool WDV

• Head (b) does not apply:- on a sale at an undervalue to a person not eligible to claim allowances or to certain dual resident companies, or - where the vendor’s business ceased without the building being sold

• In such cases the purchaser needs the vendor to give him a statement of his disposal value brought into account

• The vendor (or a previous owner if the vendor was not entitled to claim the allowances) allocated his expenditure on the fixtures to a plant and machinery pool in an accounting period (or tax year) beginning before he sold the building (or he claimed a first year allowance in respect of the expenditure)

The Pooling Requirement

Things to note

• The vendor does not have to have claimed capital allowances

• But he has to have brought the expenditure into an asset pool

• He can do this only in his corporation tax computations

• Which have to be sent to HMRC within 12 months of the end of the AP (although they can be amended for another 12 months)

• Many landlords do not claim allowances- particularly non-residents- because their interest payments largely cover the rent- and they like to keep a low profile with HMRC

• So they will not be aware of the rules• And may cease to have a UK presence

• Where allowances have not been claimed by the vendor it may not be easy to quantify the amount eligible for allowances

• Where past allowances have been claimed the amount is limited to the last person’s disposal value (or a s 198/199 election may have been made)

• If they have not you may need a surveyor!

• The vendor will not want to incur the cost- unless he has to do so as a condition of the purchase

• Even if the purchaser bears the costs the vendor may be reluctant to co-operate

- particularly if he is not asked to do so until months after the transaction

• So the issue needs to be addressed pre-completion

• The figure needs to be established early• The vendor needs it for his tax comps• You need it for the s 198 election which has a two year time

limit• It will take time to quantify the amount• Particularly if allowances have not previously been claimed or

not claimed on all of the expenditure

• If a disposal value is not brought into account by the first person to dispose of the building after 1 April 2014, the building could be permanently devalued

- as no future owner will be entitled to claim allowances on past expenditure

• There is a limited exception where the vendor is a charity, pension fund, etc

• S 187A does not apply to fixtures installed by the charity• But still applies to those installed by an earlier owner• If the charity did not make a s 198 election when it acquired

the building it can obtain a certificate from the previous owner of the disposal value brought into account by that person and pass on the benefit of that figure (which is likely to be nil)

What if the vendor is a charity or pension fund?

• It is still able to make a s 198 election- but may not want to spend time or money negotiating a figure with its vendor

• Or to apply to the FTT to fix the value- but does it want to incur the cost?

• It can instead get a certificate from its vendor of its disposal value

- but that may be nil or very low

What if the purchaser is a charity or pension fund?

• Such a certificate from a previous owner must be given by the last person entitled to claim allowances

- and must state that it is now too late for him to make an election, and- his disposal value brought into account

• Such a certificate can be used only if his purchaser (or all subsequent purchasers) was not entitled to claim allowances

What if the vendor is insolvent?

• Tough luck??• Insolvency practitioners do not normally want to expend time

or money to help a purchaser• Indeed, it is probably improper for them to do so unless doing

it will increase the sale price of the building

Practicalities of the claim

28 January 2014

CBW Tax

Practicalities

• Establishing the value

• Process – what we need from you

• Remember

Value of Allowances

Type of Building Acquisition Cost

Tax saved

Office, high spec. a/c £5,000,000 £350,000

Industrial Warehouse, light

£5,000,000 £200,000

Mixed use retail/leisure £5,000,000 £100,000

Hotel, 5 star £5,000,000 £350,000

Preparing the Claim

Process

• Likely to be either during the purchase or immediately post completion with the benefit of contractual support

• Timescale – seller will have to include the disposal value in his tax comps, which usually are filed 12 months after their year end

• A s198 Election must be completed within 2 years of the transaction date

Process – Post April 14

• Where the seller has not claimed (but was entitled to do so) the buyer MUST satisfy the following to be able to claim

• Pooling requirement• Fixed value requirement

• But how?

Pooling Requirement

The buyer will need to

• Establish a just apportionment of purchase price, at the point of the seller’s purchase;

• Just apportionment splits purchase price between• Qualifying plant & machinery• Non qualifying building• Land value

• Identify the plant & machinery

• The seller will need to allocate the expenditure to the relevant asset pool

Fixed Value Requirement

• Seller and buyer agree to fix the sellers disposal value

• Through• Joint CAA2001 s198 Election• Tribunal• Disposal value statement

• Best case for buyer• Disposal value is fixed at the sellers original cost – this is

the maximum claim available to the buyer.

Contractual Provisions

Contractual provisions should require the seller to provide:-• His purchase price;• Date of purchase;• From whom purchase made;• Whether any agreement entered into at point of

purchase;• Details of any capital works carried out during his

ownership;• Agree to pool the allowances, once quantified;• Agree to not claim the allowances; AND• Agree to enter a s198 Election at his original cost

Realities

• A property where the seller has been through the process of identifying the allowances will be more marketable?

• If no allowances claimed previously, calculations are likely to be at the purchasers expense – but significant benefit

• Without contractual support the process is going to be very difficult

• Clients will be looking to their solicitors to deal with these matters during the transaction

• Take careful note of the information provided by the Vendor in the CPS enquiries

Acting for the Seller

Post April 2014

• Consider the capital allowances available on the property and their value;

• If no claim made by current owner, consider making claim and keeping the benefit; or

• If no claim made, consider ‘selling’ the benefit as part of the transaction; require the buyer to incur the costs in identifying the allowances

Remember

Post April 14

• Allowances to a purchaser CAN BE COMPLETELY LOST without action on capital allowances at acquisition

• The value of allowances can be considerable - they are worth protecting

• If buying from a charity, public authority, pension fund etc, allowances may still be available

• Do not ignore allowances during the transaction

Contact Us

CBW Tax LimitedEnterprise House 21 Buckle StreetLondon E1 8NN

t: + 44 (0)20 7309 3800 f: + 44 (0)20 7309 3801

e: info@cbw.co.ukw: cbwtax.co.uk

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Saira started her tax career at Andersen, where she gained her ATT qualification, moving after a year to Deloitte & Touche to spend four years in the Property Tax Team. Saira then spent two more years with KPMG before being persuaded to set up her own practice to work for select clients only.

She joined CBW in March 2008 as a specialist consultant on property tax issues. She also holds a MRICS qualification.

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With 30 years’ general practice experience, including advising on flotation's, MBOs and secondary buyouts, Andy makes an excellent advisor to most businesses experiencing rapid growth or considering strategic changes.

t: +44 (0)20 7309 3917andy.white@cbw.co.uk

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Tax Partner

Thomas is a specialist in helping businesses to understand the tax implications of their actions. He works closely with entrepreneurs to manage their tax liability when engaging in property deals, M&A, re-organisations, growth, international deals or when simply looking to improve their tax efficiency.

He also works with ambitious and successful individuals who wish to build, spend or share their personal wealth tax efficiently.

t: +44 (0)20 7309 3856thomas.adcock@cbw.co.uk