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John Lovell of Lovell Consulting , interviewed by Melissa Moore of LexisPSL Property, reflects on how changes to the Finance Act in April 2014 have affected real estate transactions.
Take for example a non-resident property investment company purchasing a property for £20m with potential capital allowances of £4m made up as follows:
Using the capital allowances could nearly halve the tax bill in year 1 leading to a much better yield. If the Annual Investment Allowance has not been utilized it may be possible to accelerate the allowances. Currently the first £500,000 is available
as an AIA, depending on the year end and when the expenditure is incurred.
Total tax savings on a simple example per £100,000 over the written down period of 20 years could be significant:
Client profile: individuals, companies, partnerships or overseas investors can claim capital allowances, provided they are chargeable to UK tax i.e. not charitable, pension funds etc.
The Property: subject only to limited exceptions (including furnished holiday lets (FHLs); communal areas to apartment blocks; and student accommodation) the property must be a commercial property.
The Ownership Intention: the client must hold the property as an investment i.e. the relief is not available to developers (except land remediation relief)
Contaminated Land Relief: applies to commercial land held for investment purposes but can also be claimed by property developers and for residential developments.
The available allowances will differ between different types of property. For instance, hotels typically have significant plant and equipment and hence the level of allowances is likely to be higher.
Typical rates of allowance (expressed as a percentage of purchase price) for various types of property are set out in the table below. The value of allowances will depend on any previous claims made by a former owner and any tax elections which may
reduce the quantum.
Sanitary fittings; Fittings, furniture and equipment; Carpet tiles; Fire alarm; Telephone and computer system; Demountable Partitions; Sprinklers; Swimming Pools.
Lifts, escalators and moving walkways, hot water systems, heating, air conditioning and ventilation systems.
Also (since introduction of wider definition in 2008): Electrical lighting and power systems, cold water systems, external solar shading, thermal insulation to an existing building.
Introduced by Finance Act 2001
Energy Technologies – April 2001
Water Technologies – April 2003
Only specific products included on the ECA list qualify. See government websites: etl.decc.gov.uk and wtl.defra.gov.uk
Including Japanese knotweed, asbestos and services diversions.
Wider definition if land is classified as derelict.
Only available to UK Limited companies.
Available to both developers and investors.
The law society Practical Guidance on capital allowances is a good guide to follow for best practice
and stresses that whether you are acting for the seller or purchaser, you should raise the issue of CAs with your client as early as possible. If you are unsure about how to go about this, just as you would advise your client to carry out a survey
or obtain insurance advice, you should consult a specialist CA adviser, or suggest your client consults one directly.
Accountants and their advisors may of course be aware of and handle any capital allowances claim as part of routine tax compliance. However, retaining a specialist may provide your client with further comfort that the full extent of qualifying expenditure
has been picked up. There can also be differences between an accountant’s approach to claiming allowances (typically a desktop invoice review) and that taken by a specialist. A specialist CA advisor would be able to further explain the
specialist methodology and its benefits.
In short, no.
Initially a CA specialist will undertake entitlement due diligence to identify whether there is potential for a capital allowances claim and the likely saving. This is purely a desktop exercise, based on the facts of the case. It usually takes no more
than two days and is typically free of charge.
Surveying the building is the most time-consuming step but legislation allows 2 years for this to take place following completion. Therefore, provided that the sale and purchase contract makes appropriate provision for the survey and agreement process
this should not hold up the transaction.
Initial reviews are often provided free of charge. As a rough rule of thumb, the cost of surveying the building, agreeing and processing allowance claims is approximately 10 percent of the saving, reducing for higher claims, depending on the amount
of the allowance claim.
For case studies see further http://www.lovellconsulting.com/case-studies/ and http://www.lovellconsulting.com/wp/wp-content/uploads/Back-to-Basics.pdf
Learn more at http://www.lovellconsulting.com/2015/04/13/capital-allowances-cpd-breakfast-seminar-10th-june-2015.
John Lovell was interviewed by Melissa Moore.
The views expressed by our interviewees are not necessarily those of the proprietor.
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