Purchases of Commercial Second-hand Buildings

Additional capital allowances can sometimes be available on existing buildings where claims have previously been made and elections signed. This is in relation to integral features assets which did not previously qualify for capital allowances before the integral features rules came into effect in Finance Act 2008.

From April 2012, purchasers and sellers are obliged by HM Revenue & Customs (HMRC) to fix the value of capital allowances within the majority of second-hand property acquisitions.

This requires a purchaser of a second hand property to submit a claim to HMRC within a mandatory period of 2 years, and this will affect purchasers where the following is applicable:

  • The seller has claimed capital allowances and is required to bring in a disposal value
  • The seller or a prior owner have agreed a S198 election
  • The seller has permanently discontinued their business, or
  • A tribunal has been required to determine the apportionable sum between the seller and purchaser.

The purchaser is also required to provide the relevant information to HMRC, ie agreed election, tribunal decision or (in the event that a property is sold at less than market value) a disposal value statement within a 2 year period in order to prove that the requirements in the legislation have been satisfied.

This will not affect a purchaser where a seller was unable to claim, ie the property was held by a trader, pension fund or public authority. Properties purchased directly from a developer will remain unaffected by these changes. However if the seller had been able to claim and did not notify HMRC within the mandatory 2 year period, the purchaser (and all future purchasers) will be unable to claim on these fixtures.

In order to make a successful claim, the legislation must be thoroughly understood and detailed investigation made of the history of the property including examination of the contract of sale, leases, agreements, details of vendor, and dates of purchase as well as obtaining the relevant information to submit to HMRC.

Correct valuation techniques must also be employed and an apportionment of the purchase price must be undertaken, as the purchase price reflects the value of the land, building and plant and machinery in total. The value of each element must be reconstructed and a multiplier applied to each variant to ensure that the total comes back to the purchase price.

When dealing with second-hand property, as well as obtaining tax savings, capital allowances can have a positive effect on property yields.

Since April 2014, in order for a purchaser to be able to claim capital allowances, the seller may need to identify and bring qualifying expenditure into a pool if it was eligible to claim capital allowances. If the seller could not itself claim allowances (eg if it is a charity or trading company) other documentation will need to be in place in relation to the vendor and previous owners. If these are not obtained, allowances on the property might be lost forever, which could permanently reduce the value of the property.

All commercial property owners must now be pro-active in their capital allowances affairs.

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