Capital Allowances – Sale of Property with Buildings

Oct 2
14:03

2012

Daniel Kidd

Daniel Kidd

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Changes have been made to the rules governing claims for capital allowances on fixtures that are transferred as part of a property where the seller was entitled to claim capital allowances. The changes take effect from 1 April 2012 for companies. Deals which complete on or after this date will be affected.

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Just by way of re-cap,Capital Allowances – Sale of Property with Buildings Articles capital allowances are potentially very valuable to a tax payer as they allow a portion of the cost of an asset to be written off against taxable profits over a period of years. Hence, there is a potential tax saving to any property owner and there are important tax strategies that can be applied depending on whether you are acting for the seller or the buyer (see below).

 

First requirement – agree a value

 

In essence, the first requirement imposed by the new rules requires the buyer and seller to agree within two years of the transaction (if possible) on the value to be apportioned to the fixtures.

 

Generally, this will take the form of an election (usually referred to as a "section 198 election"), which many of us are familiar with. Ideally the parties will agree the value before the contract is exchanged and incorporate the detail in the contract. If the parties cannot agree on the value, either party may apply within the twoyear period to the tax tribunal for a ruling.

 

Second requirement – "pool" the assets

 

A further requirement has been introduced, that the seller must "pool" the assets before the sale. In effect, this means that the seller is obliged to identify and claim the allowances before the point of sale. This issue will need to be picked up in the pre-sale DD process.

 

Impact and best practice

 

Fixtures acquired as part of a property acquisition will havean acquisition value of £nil to the buyer for the purposes offuture capital allowance claims if these two requirementsare not met. Ideally, you should address the apportionment when negotiating the deal (preferably at theHeads of Terms stage). An application to the tribunalshould be avoided as it will be costly.

 

It is generally to the seller's advantage to argue for a low figure as this means that the seller retains the allowances.

 

It is possible to agree a nominal value as low as £1. The buyer would typically wish to secure a higher value, maybe based on the unutilised tax value of the assets (referred to in tax circles as "the tax written down value").

 

The parties are free to agree the approach as part of the commercial deal, failing which they may ultimately need to apply to the tribunal. An increased awareness of the importance of capital allowances is likely to follow these changes.

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