Capital allowances on your commercial property - when is the right time for a review?
If your company has invested in buying or improving commercial property in the UK, you’ll know that there are very few tax reliefs available. However, you might be sitting on unclaimed tax savings that could be released with the help of a specialised Capital Allowances Review.
Read on to find out how Capital Allowances work, the specialised allowance that most businesses are not taking full advantage of, and when you should conduct a Capital Allowances Review.
How do Capital Allowances for commercial property work?
Capital Allowances allow commercial property owners to claim qualifying items of plant and machinery for exclusive use in your business as a tax deduction. Understanding Capital Allowances are also an important factor when buying and selling commercial property. Getting the right advice is crucial in securing tax savings for you and your business.
How do I know if I can claim for my company?
Capital allowances may be available for up to 100% of your business investment in plant and machinery. Commercial buildings, however, can be more complex, as Property Embedded Fixtures and Features (PEFFs) need to be valued as well as the building. Fixtures and features can include many items that are embedded in the building. Even small items such as power sockets, network sockets and phone points count, which can soon add up once the whole building has been taken into consideration. These are all essential to the building and contribute to the business.
Because a comprehensive analysis of the value of PEFFs requires the expert skills of surveyors and specialist tax consultants, many claims have historically been missed. It has been estimated that millions of pounds of tax relief still remains unclaimed by property owners in this area of Capital Allowances alone!
When should you conduct a Capital Allowances Review?
When improving or refurbishing existing commercial buildings
If your company is planning to spend £200,000 or more on a refurbishment, then it would be advantageous to conduct a Capital Allowances Review before commencing the project. The review would illuminate any areas of the proposed capital expenditure that could be optimised to attract more beneficial capital allowances, such as additional investment in energy-efficient lighting or air conditioning etc. that would attract First Year Allowances (FYA).
One of the benefits of investing in a Capital Allowances Review is the ongoing support of your tax advisor. As Tax Manager here at Finling, I personally support our clients during a refurbishment by reviewing construction cost information to ensure that there is sufficient detail to be able to claim the appropriate capital allowances.
This is to safeguard that all cost claims are compliant and that nothing is missed out on due to a lack of specific detail to support a capital allowances claim.
2. When purchasing second-hand commercial buildings
Changes to the legislation governing capital allowances on property transactions, as well as commercial pressures to just “get the deal done” can often lead to missed opportunities for relief.
Since Capital Allowances is a specialised area, lawyers and consultants dealing with the purchase in most cases will not have enough information to determine the potential capital allowances available to a purchaser. In order to avoid capital allowances claims being overlooked, we strongly advise that you arrange a Capital Allowances Review before purchasing previously-owned commercial buildings.
The review would...
Ascertain the extent to which the seller has been claiming capital allowances, and ensure that you, the buyer, are maximising the capital allowances available once the transaction has gone through.
Clarify the current situation on ‘Pooling’. This rule applies since April 2014 and requires the seller to stipulate that they have ‘pooled’ the expenditure on fixtures before the property is sold. If the Pooling Requirement is not met in the eyes of HMRC, then HMRC will deem the value of any fixtures acquired to be nil so no capital allowances can be claimed by you, the buyer!
Support any S.198 Election - a joint election between the seller and you, the buyer to agree on the amount of the sale price that is to be attributed to fixtures, which is capped at the seller’s original costs. This joint election must be made within two years of the sale.
3. When acquiring newly-constructed commercial property or premises
When acquiring new premises, a sizeable part of the purchase price may be allocated to fixtures qualifying for tax relief, and/or the entitlement to allowances may need to be safeguarded by the inclusion of capital allowances clauses in the purchase contract.
Just like in the case of refurbishment, the Capital Allowances Review process would involve reviewing the construction cost information thoroughly to ensure that there is sufficient detail to support the appropriate capital allowances claim. This would also be an opportune moment to identify any energy and/or water-saving technologies that have been installed and whether these would attract any further allowances.
How are Capital Allowances claimed?
During a Capital Allowances Review here at Finling, we conduct a detailed review of your expenditure and identify any potential capital allowance claims. We then request any available tax repayments from HMRC and continue to support you throughout this claims process.
The claim is used to generate a tax refund where possible and as a tax credit to reduce future tax liabilities. Our Capital Allowance Review ensures the tax benefit is incorporated in the most efficient way for your business’ current situation.
Claiming capital allowances for commercial property can reduce your tax liabilities substantially, yet are often missed, particularly on PEFFs. Seek specialist advice early if refurbishing or acquiring commercial buildings. Your initial investment in a Capital Allowances Review will pay for itself many times over.
Here at Finling, we want to make scaling a company smoother, less stressful and more rewarding for real estate entrepreneurs. If you want to have a well-resourced, agile and fully skilled finance team on your side when making your next commercial property investment, take a look at Finling for Entrepreneurs or get in touch.