Some owners of commercial properties in the UK have lost thousands in tax relief due to a little known change in the tax rules on capital allowances, which came into effect in April 2014.
New owners of a commercial property can usually claim tax allowances for spending on plant, equipment and machinery. As this includes items such as carpets, lighting, air conditioning systems, lifts, electrical systems, water installations and security equipment, the amounts involved can be substantial and have a bearing on the sale value of a property.
The value of these capital allowances can be a significant proportion of the sale price of a commercial property which can be transferred to the buyer. Typical commercial property transactions can attract capital allowance valuations at 25% of the purchase price and in some cases can be far higher.
Previous to the rule change there was no time limit on when the new owner could make a claim for these capital allowances, but now allowances can only be claimed only in the first two years of ownership.
Also, from April 2014 the availability of capital allowances for buyers is dependent on the pre-sale actions of the vendor of that property: the buyer will not be able to claim relief if the previous owner did not claim the capital allowance within this new two-year period. If a seller who is entitled to the capital allowances has not claimed, the buyer looses out.
One consequence is that those people buying commercial properties might pull property prices down to compensate for any loss of relief.
HM Revenue & Customs claim that these changes have been brought in to formalise the process by which taxation relief may be claimed by the purchaser of a commercial property and to crack down on property owners making fraudulent tax relief claims.
Taxation experts have estimated that around £100m of capital allowances has already been lost relating to sales which have gone through since April 2014 because buyers were not aware or did not understand the implications of the new rules.
The rule changes affect all commercial property transactions so it is important that buyers and sellers take specialist tax advice at the conveyancing stage to establish the tax position and if necessary the buyer will need to negotiate before the contract is drafted to ensure the capital allowances pass with the property.