Buyers and sellers of second hand commercial properties need to be aware of the changes that were made to the capital allowances regime, which came into force on 1 April 2012. Julia Lock, an Associate with east Midlands law firm Andrew & Co LLP explains the changes and their implications.
Previously, buyers of second hand commercial properties could make a Section 198 Election in respect of capital allowances for the fixtures and fittings of a property, items such as the heating system or electricity system. They could do this by apportioning part of the agreed price to the items. Alternatively, if the seller had not made a claim for capital allowances, the buyer could carry out a survey of the property immediately following completion and then make a reasonable apportionment for such items for the purposes of capital allowances.
The new regime effective from 1 April 2012 brings two main changes. Firstly, if the seller has made no claim for capital allowances then the buyer can no longer make a post-completion apportionment. This could be costly to the buyer as it could reduce the property’s future saleability as any future right to claim capital allowances on the original plant and machinery purchased as part of the original purchase would be lost. For example, if a subsequent purchaser had the choice of two properties, one of which had elected in respect of capital allowances and one that had not, then the first property could have a potential tax relief attached to it whereas the second one would not. If the seller has not claimed capital allowances on all, or any plant, then he or she should do so before exchange of contracts in order to ensure that the necessary Section 198 Election can be made.
Secondly, in the event that a seller has made a capital allowances claim, the amount to be apportioned to relevant fixtures and fittings must be specified in the sale agreement, otherwise the matter will automatically be transferred to a taxation tribunal for determination. This is not advisable as any involvement with the tribunal will no doubt be costly and time consuming for all concerned.
It is therefore important for buyers to obtain as much information as possible in relation to capital allowances at the very outset of a transaction.
Both sellers and buyers are advised to take professional advice in connection with capital allowances and the implications of the same on the sale or purchase of a commercial property, as early as possible in a transaction in order to avoid delaying the sale.
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