What tax relief can I claim when buying commercial property?
Businesses buying or selling commercial property could be hit financially if they fail to act on important changes to capital allowances on fixtures.
Fixtures include the plant and machinery that form part of the property, such as heating equipment, air conditioning and hot water systems. Since 2008, general lighting, electrical installations and cold water systems have also qualified as plant.
Tax is not usually the first thing on the mind when buying or selling commercial property, but these changes mean it must be prioritised to avoid losing out financially. In the past, it has often been possible to deal with tax issues after completion. However, this has all been changed by amendments to the rules for capital allowances that came into effect on April 1, 2012.
How the changes affect transactions
The changes mean that in order to claim capital allowances, purchasers must sign a joint ‘section 198’ election with the vendor, confirming the apportioned price of the fixtures. It is no longer acceptable for the contract to set out the apportionment – indeed any contract apportionment of proceeds is now completely irrelevant to the allowances that can be claimed on fixtures.
Without a signed election, the purchaser cannot claim any allowances on the fixtures, nor can any future purchaser. In theory, the time limit for signing the election is two years after the date of contract. In practice, though, there will be no incentive for the vendor to sign an election after completion. So it is imperative that the purchaser ensures the election is signed before completion.
The need to negotiate
The election is binding on the vendor as well as the purchaser, which usually involves a conflict between the interests of the vendor and the purchaser: a high claim will reduce the purchaser’s tax bill and increase the vendor’s bill, and vice versa. Ultimately, the figure must be reached by negotiation.
But what if an election is not signed? As we have already seen, this will prevent the purchaser claiming allowances. The vendor, on the other hand, will still have a clawback of capital allowances, based on a just and reasonable apportionment of the contract price.
Section 198 elections are not new, although they have seldom been used in the past. However, from now on they will be a crucial part of the property transaction.
VAT is equally important. The purchaser must obtain confirmation of whether VAT is chargeable on the purchase price. If it is, he will need evidence in the form of the option to tax, because if VAT is wrongly charged, the purchaser will not be able to recover it.
So, while tax will not be the driving factor in commercial property deals, capital allowances and VAT should be addressed in good time, before contracts are exchanged if potentially significant extra costs are to be avoided.