Capital Allowances on Commercial Property - Important Changes from April 2014

The method with which capital allowances are passed between the seller and buyer of a commercial property changes dramatically from April 2014. These rules will affect all commercial property transactions involving a taxpayer and even if capital allowances have not been claimed, appropriate care should be taken to deal with the issue before completion of the transaction.

These new rules were introduced by the Government in an attempt to formalise the process by which taxation relief for fixtures and fittings (in the form of capital allowances) may be claimed by the purchaser of a commercial property. For example, capital allowances may be claimed on items such as the electrical system, water installations, air-conditioning equipment and security equipment.

Background

  • The value of capital allowances can be a significant element of the sale price of the property and this value can, potentally, transfer along with the property to the buyer 
  • However, the way in which they transfer changes in April 2014 and these changes will have very far-reaching implications for solicitors and their clients alike.
  • From April 2014, the availability of capital allowances for the buyer of a commercial property is dependent on the actions of the seller of that property.
  • For transactions after April 2014, if a seller who is entitled to capital allowances has not claimed, the buyer gets absolutely nothing. 

Protecting and Maximising

  • Generally, as part of the conveyancing process, the solicitor acting for the buyer will make enquiries of the seller to ascertain the capital allowances position.
  • It is imperative that buyers and sellers take specialist capital allowances advice at this stage of the conveyancing process to ensure their taxation position is secured.
  • The buyer may need to negotiate with the seller before the contract is drafted to ensure an equitable position between the parties and to allow the capital allowances to pass with the property.
  • On a typical commercial property transaction, capital allowances would be valued at approximately 25% of the purchase price. However, the value may, in fact, prove to be much higher depending upon specification and use of the property. 

Conclusion

We would advise all clients who are considering the purchase or sale of a commercial property to contact us prior to the drafting of contracts. The added value of capital allowances in a commercial property can be significant to a buyer, but also the risk of not understanding and applying the new legislation can be severely detrimental to a seller.