There are a number of changes to come regarding capital allowances, the tax relief obtained on the purchase of plant and machinery.
Annual Investment Allowance (AIA)
The AIA provides a 100% deduction for the cost of most plant and machinery (not cars) purchased by a business up to an annual limit and is available to most businesses. Where businesses spend more than the annual limit, any additional qualifying expenditure generally attracts an annual writing down allowance of only 18% or 8% depending on the type of asset.
The maximum amount of the AIA was increased to £250,000 from £25,000 for the period from 1 January 2013 to 31 December 2014. It was due to go back down to £25,000 from 1 January 2015. However, in the budget this month it has been announced that the amount of AIA is now further increased to £500,000 from 1 April 2014 for companies or 6 April 2014 for unincorporated businesses until 31 December 2015. The AIA is then expected to return again to £25,000 after this date.
The increased AIA will mean that up to 99.8% of businesses could receive 100% upfront relief on their qualifying investment in plant and machinery. For example a single company with a 12 month accounting period to 31 December 2014 could obtain overall relief for the period of £437,500 (£250,000 x 3/12 plus £500,000 x 9/12). There is a restriction of £250,000 for expenditure incurred in that part of the accounting period which falls before 1 April 2014. Careful planning may be required to take advantage of this relief.
New rules on purchasing commercial property
If you buy a second hand commercial property (including farms) post April, and you wish to claim capital allowances on the fixtures and fittings, if 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”). Fixtures are items attached to a building, such as heating, lighting and electrical systems and drainage systems.
You and the vendor will then need to agree a price for those items and sign a joint election. The price agreed in the election gives the amount you can then claim tax relief on for those items and you will need to make certain the contract includes reference to these items.
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.
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. If the value of the fixtures is not agreed then no one will be able to claim capital allowances on the items in the future which could devalue the property going forward. Therefore we recommend that where you are buying or selling property you should take advice from a specialist early on