Introduction »

Take care before you buy

Are you planning to buy an existing building from which you are going to trade? If so, there are opportunities to reduce the effective cost of the purchase by maximising the potential capital allowances claims.

Currently there is limited scope for capital allowances in respect of buildings or structures. However, in some cases a significant part of the purchase price may be attributable to ‘fixtures’ which qualify for plant and machinery capital allowances.

Typical examples of qualifying fixtures include:

• heating systems
• electrical systems
• sanitary ware
• air conditioning.

These fixtures are ‘hidden’ within the building which helps to explain why capital allowances claims are missed. Indeed the tax definition of a fixture is an asset which is installed or otherwise fixed in or to a building or land so as to become part of that building or land in law.

Effective allocation

How is the allocation of the overall purchase for the building split between the fixtures and the remaining part of the structure? Clearly it is in the purchaser’s interest to maximise the amount attributable to fixtures but there are controls.

• The main control in tax law where a property has been purchased is the need to apportion the overall price on a just and reasonable basis. If an apportionment has been included in the purchase agreement, HMRC can challenge the allocation as not being just and reasonable.
• The viewpoint of the vendor will also be important. If he has previously claimed allowances on the fixtures he may want a low allocation so that he retains some of the allowances he has previously claimed. The vendor is however also constrained by the just and reasonable override.
• A useful facility does however exist, known as a ‘s198 election’ which, within certain limits allows the vendor and purchaser to jointly elect a value for specific fixtures. The vendor and purchaser could therefore agree to allocate a value of £1 to particular fixtures thus allowing the vendor to retain the benefit of allowances previously claimed. Clearly a low figure is not in the interest of the purchaser because it restricts their entitlement to claim capital allowances. However, if the nature of the election is understood by the purchaser, the agreement to sign the election can be used in the overall negotiations in determining the purchase price of the property.

In any case if you are the purchaser, you may still be entitled to claim certain plant allowances even if a s198 election has been signed. This is because the election only covers fixtures on which capital allowances have previously been claimed.

Eric will still be able to claim plant allowances on the furniture (as it is not a ‘fixture’, s198 does not apply to that part) and on the electrical and cold water system (as previous owners have not claimed allowances on those fixtures).

As you can see, this is a complex matter, so please talk to us before you sign the contract for the purchase of a commercial property.

Introduction »