Understanding Capital Allowances for UK investors buying a commercial property
Welcome to our informative guide on Capital Allowances in the UK, a topic of significant interest if you own commercial property. Whether you’ve just acquired a new space or you’re refurbishing an old one, understanding Capital Allowances can be vital for your business’s financial health.
What are Capital Allowances?
Capital Allowances in the UK offer tax relief to commercial property owners, based on the value of certain items within the building. These aren’t tax loopholes; they’re legitimate incentives sanctioned by the government to encourage investment in business assets.
Plant and Machinery Allowances (PMAs)
Once identified, these are claimed at 18% per year on a reducing balance.
Integral Feature Allowances (IFAs)
Claimed at 6% per year on a reducing balance, covering essential building features.
Annual Investment Allowances (AIAs)
These allow for a full write-off of Capital Allowances up to a set amount within the financial year they are identified.
Enhanced Capital Allowances (ECAs)
Offer 100% tax relief in the first year for some specific eco-friendly assets or properties in designated zones.
Structural & Building Allowances (SBAs)
Not strictly Capital Allowances, they allow for 3% annual relief on commercial buildings’ structures but require repayment if the property is sold within 34 years.
Land Remediation Allowances (LMAs)
Enable recovery of costs for cleaning up contaminated land, assuming you’re not responsible for that contamination.
The availability and forms of Capital Allowances UK can change with each budget announcement, so staying informed is key.
A real-life scenario
A client purchased a property for £600,000, but did not claim Capital Allowances because they weren’t identified in the purchase contract. The result? A potential loss of £120,000 to £180,000 in tax relief.
This brings us to a crucial point: timing is everything. Since the 2014 legislative changes, Capital Allowances must be identified and documented during the purchase process, or the opportunity to claim them is lost.
We were brought on board three years after the purchase, so were late to challenge the accuracy of the documentation.
The process and how it works
When buying a property, ensure your legal team inquires about Capital Allowances in the UK. Proper responses should inform the contract and appendices, ensuring entitlement to these allowances is transferred correctly.
If the seller has claimed Capital Allowances, an Election Notice is required to transfer these to the buyer. This legal document must be carefully managed to bind all parties, including HMRC, to the agreed terms.
If the seller has not claimed Capital Allowances, there should not be an Election Notice, unless a prior owner made a claim but this should be investigated fully to ensure that prior claim relates to what is still in the building!
For building works carried out after a prior claim
For new constructions, alterations, fit-outs, and refurbishments, a broad of Capital Allowances is available. It’s not just about identifying these allowances but proving their value with detailed records from contractors, subcontractors, and consultants. These cannot be restricted UNLESS the seller has made a claim on them.
Remember, it’s not about knowing all the details but asking the right questions at the right time. Whether you’re dealing with the purchase of a newly built property or an old one, Capital Allowances in the UK can offer substantial savings. Don’t miss out on these opportunities—stay informed and seek professional advice when necessary.