Uncovering capital allowances at the beginning of a property acquisition

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Gateley Capitus

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In this insight we look at how to incorporate all available tax reliefs from the offset, in order to unlock the maximum value in any transaction.

The importance of capital allowances can sometimes be overlooked, particularly when set against the more pressing business of getting a deal over the line. However, it is possible for property investors to work on a transaction while at the same time considering the potential value of capital allowances, without losing sight of the end goal.

Mandatory pooling and fixed value requirement

It’s important to recognise that the buyer of a commercial building can only claim plant and machinery allowances (PMAs) if the expenditure on the fixtures is pooled before the sale.

The seller and buyer must either formally agree a value for fixtures within two years of a transfer, or start formal proceedings to agree the value within that time.

This means that the tax relief available to a buyer is entirely dependent on what the seller has done previously and, importantly, the level of expertise involved when taking those decisions. Without correctly assessing the historical ownership of a property, a buyer is risking the equivalent of up to 10% of the purchase price in tax relief.

What is a CAA2001 s198 election?

A CAA2001 s198 election is the legal mechanism to either retain allowances upon disposal or pass those allowances to the new owner. This is the only way to preserve the value of tax relief available from capital allowances. For a buyer, it is critical that the seller pools all allowances; if this is not done then the buyer can lose any entitlement to claim once the transaction completes.

Unfortunately, your seller may have been badly advised in the past which could result in you losing all legal entitlement to unclaimed allowances. Most property agents do not see the importance of capital allowances as part of a transaction; this is demonstrated by a general lack of detail contained within many Heads of Terms (HoT).

Read our related capital allowances insight: 

This article is the first in a series of posts designed to help commercial property investors make the most of capital allowances. 

Look out for further articles in this series where we’ll look at a couple of practical examples that highlight the importance of thorough due diligence prior to a property acquisition, and share our top tips on how to protect your capital allowances from the offset. Next, we turn to Heads of Terms and why they’re so important in this process.

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