Tax relief on fixtures when buying a hotel
The Finance Act 2012 contains new rules which took effect in April 2012 that affect anyone buying a hotel or other trading property. It is generally well known that part of the purchase price of a property can attract capital allowances, reducing the tax liabilities for the purchaser. Historically, the claim could be sorted out with the first set of accounts, but under the new rules it is imperative that the capital allowances position is addressed before contracts are exchanged.
The reason for this is that a claim for capital allowances on fixtures can now be made only if the vendor and purchaser make a joint election specifying the amount of fixtures qualifying for capital allowances. This sum must then be used in the tax computations of both the vendor and the purchaser.
If no election is made, the purchaser will never be able to claim capital allowances on the fixtures content of the purchase price – and neither will any future purchaser of the hotel. The vendor, on the other hand, is still required to bring in a just and reasonable apportionment of the sale price to reflect the disposal of fixtures in his capital allowances computation.
It is therefore vital that as part of the pre contract sale enquiries, the amount of the fixtures claim is agreed. Furthermore, it should be made a condition of the contract that the fixtures claim is signed in the agreed amount, since it may be difficult to persuade the vendor to sign an election after completion.
These rules apply only to ‘fixtures’, which are those items such as heating systems which are transferred as part of the conveyance of the property. They do not apply to loose plant and machinery, such as furniture and kitchen appliances. Capital allowances may be claimed on those items by making a just and reasonable apportionment of the purchase price, and there is no requirement for a written election.
In the consultation process before the Budget, the government had proposed that any capital allowance claims in respect of existing buildings (acquired before April 2012) would have to be made by a certain date. This proposal was dropped from the final legislation. Hence, if you have properties which were acquired before April 2012, and no capital allowances were claimed on the original purchase price, it is still possible to make a claim.
Making a claim requires a valuation by a surveyor of the replacement cost of the property and the fixtures. HMRC will also require enquiries to be made from the previous owner of the amount of expenditure they incurred on fixtures and how they accounted for in their capital allowances computations. The effort in making a claim is invariably worthwhile. For a hotel with a purchase price of £2m and fixtures content of 20%, tax in the order of £40,000 can be saved over a three year period. However, a poorly presented claim will encounter resistance from HMRC.
Moore and Smalley LLP has a strong track record of successful claims, prepared in conjunction with local surveyors. Please do not hesitate to contact us for advice in this area.