For example, when buying a £500,000 commercial property, and correctly using available capital allowance tax relief, you can reduce the purchase price considerably, to pay an effective price of as little as £420,000.
Buyers of commercial property will need to make sure that they, and their advisors, know about the new rules for claiming tax relief on fixtures in any second-hand property purchased on or after 6 April 2014, or 1 April 2014 when buying through a company.
Fixtures are items attached to a building’s structure, such as lifts, heating, lighting and electrical systems, sanitary ware, kitchen units, air conditioning, ventilation systems, alarms and sprinkler systems.
Claiming tax relief on these items will help reduce the net cost of the property for buyers.
The new rules
If you buy a commercial property after April, and the vendor could have claimed tax relief on any fixtures in the property, those fixtures have to be identified, valued and added to the vendor’s capital allowance pool for tax purposes (known as “pooling”).
You and the vendor will then need to agree a price for those items and sign a joint election, known as a Section 198 election. The price agreed in the election gives the amount you can then claim tax relief on for those items.
There may also be other items that you, as the new owner can claim relief on, where the vendor could not. These will largely be electrical or cold water systems, depending on how long the vendor owned the property, or when these systems were last replaced. A value will need to be attached to these items, as a “just and reasonable” apportionment of the purchase price, and this then gives an additional amount that you can claim tax relief on.
It is vital, as part of the pre contract enquiries, that you establish exactly what fixtures the vendor has claimed tax relief on, what he could claim on and still needs to pool, and what he could not claim on, but you can. This information will come from the vendor’s accountant or the vendor himself and needs to be as complete as possible.
A price will then need to be agreed for the items that the vendor has or could have claimed on and you will need to make certain the contract includes reference to these items. Often, vendors will want to keep this as low as possible, but buyers will want a high value, which is why this needs to be dealt with at pre contract stage. Any value agreed will be subject to stamp duty land tax.
If you are not able to agree making a joint election, you will be able to ask a Tax Tribunal to agree values within two years of buying the property, but this is likely to be expensive and time consuming.
Why does it matter?
Depending on the type of property, fixtures can account for up to 40% of the property’s value. An individual paying tax at 40%, buying premises costing £500,000 could therefore save up to £80,000 in tax by dealing with the purchase correctly, reducing the property cost to only £420,000. By not considering fixtures at the appropriate stage, the property will simply cost £500,000. Why pay more than you have to?
To find out more
For a free no-obligation discussion please contact Tracey Watts on 01823 286096 or firstname.lastname@example.org.