Changes to the capital allowance rules from April 2014 – don’t miss an opportunity to save tax!


The changes in capital allowances that come into effect from April 2014 will affect purchasers of second hand property containing plant and machinery and may prevent them from obtaining capital allowances.

From April 2014 capital allowances will only be available to a purchaser of second hand fixtures if the past owner had “pooled” the relevant expenditure for capital allowance purposes in a chargeable period when it owned the property.

The rules will apply to property (other than the new buildings) acquired by corporate tax payers on or after 1 April 2014 and income tax payers on property which is acquired on or after 6 April 2014.

Background

Capital allowances are valuable tax reliefs on expenditure on plant and machinery, including that which is part of a building such as lifts, central heating and sanitary ware.  Allowances are available at 8% on plant and machinery that is designated as an “integral feature” of a building, such as air conditioning, but at 18% on other plant and machinery such as sanitary ware.

Where a building containing eligible plant and machinery is purchased, capital allowances should be available to the purchaser.  The amount on which allowances are available will depend upon the price paid by the purchaser and the value agreed between the seller and the purchaser for the fixtures.

New pooling requirement

From April 2014, a seller will have to pool its expenditure on plant and machinery in a period when it owns the fixture for the allowances to be passed to the purchaser.

Pooling means adding the expenditure to the seller’s capital allowance pool.  Pooling can only apply to a seller who was entitled to claim capital allowances and not to charities and pension schemes for example.

Purchasers will need to take particular care if the seller has not claimed capital allowances.

If the seller has not claimed allowances but was entitled to, the purchaser will need to ensure that the seller agrees in the sale documentation to pool its expenditure.

If the seller was not entitled to allowances, the last owner of the property who was entitled to claim allowances (and owned the building at some time after April 2014) would have had to have pooled the expenditure for the allowances to be available to a subsequent purchaser.

Purchasers will need to find out about the sellers capital allowance position as early as possible, so that the necessary steps can be taken to preserve the capital allowances.

Election requirement

This new pooling requirement will be in addition to the fixed value or election requirement that has applied for property acquired since April 2012 and must also be satisfied if a purchaser of second-hand fixtures is to obtain allowances.

The seller and purchaser must make an election within two years from the date of completion setting out the value attributed to the fixtures, or, if they cannot agree, apply to the Tax Tribunal for the value to be determined.  The election is made under section 198 Capital Allowances Act 2001 or section 199 in the case of the grant or lease.

If the election is not made (and a direction from the Tax Tribunal not applied for) within the two year period, the purchaser is not able to claim capital allowances on the plant and machinery acquired on the property purchase.  Subsequent purchasers are also prohibited from obtaining allowances.

If an election is made, the seller will be required to bring the value in the election into account as a disposal value in its capital allowances computation and the purchaser should be able to claim allowances on this amount.

Non-taxpayers/property traders?

There are special rules that allow allowances to be preserved if an intervening owner is not entitled to claim allowances e.g. because it is a pension fund or it is holding the property as trading stock e.g. developer.

Although an election can be made when a non-taxpayer or property trader buys a property from someone entitled to claim allowances, in reality this is going to be very difficult to obtain a number of years in the future, when the previous owners have no reason to co-operate.

It is important that non-taxpayers such as pension funds pay attention to the capital allowance position and obtain the necessary information when they purchase properties, even though they themselves cannot claim allowances so that they can preserve the value of the allowances (and thereby increase the value of the property) for future purchasers.

A non-taxpayer/property trader selling a property will not be able to pool the expenditure.  In this case it will be the last owner who was entitled to claim capital allowances who would have to have pooled the expenditure – although this will only apply in respect of the past owners who disposed of the property on or after April 2014.  Again a non-taxpayer buying property will need to obtain evidence that this has happened.

Action for purchasers

Purchasers of property will need to look into the capital allowance position before they acquire a property.  Allowances can be lost if purchasers wait until after the acquisition when they are drawing up tax computations.

Non-taxpayers should also look into the capital allowance position to ensure that they do not inadvertently cause allowances to be lost, thereby reducing the value of the property.