For owners of commercial property that pay tax in the UK, a thorough review of all capital expenditure can yield surprising results in the form of capital allowances on buildings that can minimise your tax liability.
There are many situations that give rise to eligible capital expenditure. Generally speaking, a business’ expenditure on plant and machinery will qualify for capital allowances. This tends to be well-known by accountants and business owners.
However, expenditure on property-related items can also lead to valuable claims for capital allowances on buildings.
As the only form of tax relief against property capital expenditure, capital allowances on buildings applies to all properties across the commercial sector.
Capital allowances on buildings may be available where expenditure is incurred on commercial property or construction projects across the commercial sector.
Certain items are treated as part of the ‘fabric of the building’ and do not qualify for allowances. These would include windows, doors, fixed partitions and tiling.
For many other items deemed as ‘fixtures’, you are entitled to claim capital allowances on the cost, the rate of allowance depending on the specific item.
Who can claim capital allowances on buildings?
Capital allowances are available to all UK taxpayers – individuals, companies, partnerships and overseas investors (non resident landlords).
You can own the property either privately or as a limited company and it doesn’t always matter when you bought the building, we can find the allowances and you can use them against your profits immediately.
Capital allowances apply whether you own the property as an investment or it is used in your trading business.
How do I know which type of capital allowances I can claim?
For many other items deemed as ‘fixtures’, you are entitled to claim capital allowances on the cost, the rate of allowance depending on the specific item:
- Plant and machinery, Writing Down Allowance rate 18% e.g.
- fitted kitchens
- sanitary ware
- alarm systems
- data cabling
- Integral features, Writing Down Allowance rate 8% g.
- hot and cold water systems
- electrical systems
- air conditioning, air cooling or air purification
- lifts, escalators, moving walkways
- external solar shading
- Business premises renovation allowances: 100% up to April 2017 (withdrawn)
Renovation or conversion expenditure on vacant (at least one year) commercial property in ‘assisted areas’ until April 2017. Expenses only where they have been incurred prior to the 31 March 2017 deadline. Retrospective claims can be made for expenditure incurred in previous years if certain conditions are met.
- Land remediation relief: 150%
Available for limited company developers on qualifying expenditure incurred in the cleaning up of contaminated and derelict land. Costs include:
- Staffing costs such as site assessments, which are based on a percentage salary cost
- Materials used that are over and above standard issued items because of the contamination present
- Sub-contractor costs and professional fees e.g. additional site surveys to establish levels of contamination or increased sub-contractor costs who are working whilst site remains contaminated.
- Appointing contractors to clear asbestos
- Higher security perimeter fencing to stop people from entering the site
- Additional waste costs if contaminated matter can’t go to landfill as well as additional desk studies over and above the original site searches studies. Costs can also be claimed for clearing any land adjoining the site or controlled waters.
- Enhanced capital allowances: 100% First Year Allowance or 8% Writing Down Allowance
A green tax incentive available on plant and machinery, unused and not second hand, bought after 1 April 2001 that is a listed product or meets the energy-saving or water conservation criteria, for example:
- Boilers, including Biomass
- Combined Heat and Power*
- Pipework insulation
- Radiant & Warm Air Heaters
- Refrigeration Equipment
- Solar thermal systems
- Uninterruptible Power Supplies
Given the extensive range of eligible items, it becomes a matter of ensuring you claim for all items that you are entitled to.
When could a claim for capital allowances on buildings arise?
Certain trigger events should cause you to investigate your capital allowances entitlement and maximise your claim, for example:
- Purchasing ‘second-hand’ property
- Purchasing ‘brand new’ property from a developer
- Extensions, alterations or refurbishments of existing buildings
- Fit outs of property including leasehold improvements
- Other construction projects
Note there is no time limit on claiming capital allowances, save that the items in question are still in use for the purpose of the trade. In which case, it may be possible to claim tax relief for expenditure dating back to when the property was first purchased.
Capital allowances when buying or selling commercial property
It is important to remember that when you buy or sell a property, plant is also included. As part of the transaction negotiations, parties will need to enter into a joint election to agree how much of the purchase price is plant.
The vendor needs to have allocated the expenditure to a relevant capital allowance pool, with both parties agreeing the value attributable to pass on sale. Without this, the ability to claim capital allowances on these fixtures will be lost to the purchaser and any future owners.
If the capital allowance position is not resolved within two years of the transaction date then the ability to claim allowances will be lost.
If the previous owners of a building were unable to make a claim capital allowances then an opportunity may exist for you to claim based on the unrestricted market value of plant and machinery.
Mandatory ‘pooling’ requirement means a buyer can only claim capital allowances if the vendor has first included the qualifying expenditure in their tax computation. It is therefore important that any qualifying expenditure is identified, as vendors are likely to be forced to do so on sale.
Note that if a vendor fails or refuses to pool expenditure on fixtures (where it is possible to do so) there is no way for the purchaser to ‘retrieve’ the expenditure for capital allowances purposes – allowances on those fixtures will be lost to all future owners of the property.
A degree of ‘due diligence’ will be required and purchasers may also seek warranties/ indemnities from vendors in this matter.
Keep detailed records of the work done, and the costs that can be allocated to fixtures. It is much easier to document dates and costs contemporaneously than say 20 years later when the property comes to be sold.
Why take legal advice
Advice can help you maximise the tax relief available to your business through a capital allowance claim on a building and on the many other tax incentives that may be available to your business, including capital allowances for buildings including for example, if you have overseas property.
The scope of definitions across all areas is extremely broad, which makes it easy for businesses to overlook certain types of expenditure that are in fact eligible.
It is possible in the majority of situations to claim missed allowances going back several years, often to when a property was originally acquired and for items that were not thought to qualify at the time.