2012 Q1 Conveyancing Periodical - Retrospectively Speaking

January 2012

by David Elliott

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Never before has the issue of capital allowances legislation been so pertinent for solicitors involved in the conveyance of commercial properties. This is because, as from April 2012, some very important changes are to be made.

On 6 December 2011 draft clauses for the Finance Bill 2012 were published which will impact not only on the ability of commercial property owners to claim tax relief on the fixtures within their buildings, but also on solicitors - in particular, the issue of Section 198 Capital Allowances Act 2001 and CPSE question number 19.

The planned changes are a result of a consultation process, which HMRC launched in May 2011 and which ended in August. The initial proposals in the consultation document 'Capital allowances for fixtures' were intended to block the ability of current commercial owners to make retrospective claims for capital allowances on fixtures in properties. HMRC was concerned about the tax loss to the Treasury from commercial property claimants and their perception that, without an accurate database of prior claims, tax relief is currently being claimed more than once on the same properties. So they had suggested that either a one- or two-year window, post-acquisition, should be introduced for such claims. Had their proposals been implemented, then come April 2012, anyone owning a property purchased prior to April 2010 and who had not at that point made a claim for the capital allowances to which they are entitled would have 'missed out' and not been able to benefit from what can amount to tens if not hundreds of thousands of pounds of valuable tax relief.

Fortunately (in this age of austerity when so many forms of tax relief are being removed), there's some good news. Many of us within the profession were delighted to see a relaxation of what we felt were the rather draconian proposals when the draft legislation was published. The anticipated 'time limit' on making a claim for capital allowances, post-purchase (either one or two years) was dropped. This means that, even beyond April 2012, property owners who bought prior to that date will be able to make a claim, despite the fact that the property may have been purchased many years earlier.

However (and this is really important), when an owner comes to sell his commercial property, his solicitor (working in conjunction with his accountant) will need to establish a 'fair value' for the fixtures contained within the property. A Section 198 CAA2001 election will then need to be made, using this 'fair value'. Failure to do so within the two-year window for a S198 election will mean that the purchaser's claim to capital allowances in the future will be blocked - in fact, not only the current purchaser, but all subsequent purchasers will lose their right. We therefore expect that Section 198 elections will become more widespread, and it's certainly important when representing someone purchasing commercial property to point this out. Allowing them to go ahead and buy, without a Section 198 election in place, will mean that they are denied future tax relief. Should the vendor and purchaser fail to establish the value of fixtures within the two-year period, then the case can be taken to a First-Tier Tax Tribunal; however, this will be costly and therefore, we think, uncommon. We therefore expect the valuation of fixtures and the associated Section 198 election to become a standard provision of all, or certainly most sale and purchase agreements for a commercial property interest - a view endorsed by the Government.

It's worth noting that, whilst pension funds are unable to claim capital allowances (because they do not pay tax), the need to establish the capital allowances position with respect to fixtures upon purchase will be vital, as it will affect all future (tax-paying) owners of the property.

The new rules, described above, will kick in fully from April 2014. So, for purchases made in April 2014 onwards, the S198 election has to be made within two years (otherwise all entitlement to capital allowances is lost for the new and all subsequent owners. It's worth bearing in mind that the loss of such a valuable form of tax relief could have a diminutive impact on the value of the property. Failure to provide the correct advice to clients by conveyancing solicitors could leave them open to being sued by clients. This is particularly relevant when acting for a purchaser, as it is he who is likely to lose out in the future.

For transactions taking place between April 2012 and April 2014, we have something of a hybrid period to cope with, in the form of what could best be described as a 'grace period'. If the vendor has not made a claim for capital allowances, then the rules remain pretty much as they are now. This means that the purchaser will be free to make his own claim for capital allowances on the property. But if the vendor has already made a capital allowances claim, then the 'new' rules (described above) will apply, in that a Section 198 election will need to be made. If it isn't, then the right of the purchaser and all subsequent purchasers to claim capital allowances on the property will be lost. So when acting for a buyer, as from April 2012, it will be critical to identify whether or not the vendor has already made a claim. It's where he has made a claim that you will need to inform your client of the implications of failing to make a Section 198 election.

If you haven't already done so, now is the time, without question, to bring the whole issue of capital allowances to the attention of your clients. They will need to be aware of the implications of selling and buying a commercial property as from April 2012. But in broaching the subject with them you have the ideal opportunity to inform current owners of the benefits of making a capital allowances claim themselves. Given that a £1m property could deliver up to £150,000 of tax relief to a 50% taxpayer, what better way could there be of making that New Year connection with your client base?

David Elliott BSc (Hons) FCA is an expert in mitigating tax through capital allowances. A qualified chartered accountant, David is Financial Director of C A Tax Solutions Ltd.

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These articles can only be a very brief commentary and should not be relied on as legal advice. No liability is accepted for such reliance.