In this insight we look at how to put the theory into practice to highlight why commercial property investors must incorporate all available tax reliefs from the beginning of a purchase in order to unlock the maximum value of a transaction.
Why due diligence is important
The correct due diligence ensures that you are clear on whether allowances are available or not, and if they are, what you could be entitled to. An office acquired for £5m for example, could include plant and machinery allowances of between £250,000 and £1,750,000.
Here are a couple of examples of scenarios that we regularly come across that highlight why you should be considering capital allowances at the beginning of a transaction.
1. Acquiring from a tax paying seller
In this scenario, a seller has acquired an office from a company that had owned the property since 2007, for £4m. Both parties entered into a CAA 2001 s198 election, fixing the value of plant at £1. The seller believes that there are no additional allowances available and states this in the replies to Commercial Property Standard Enquiries (CPSEs). Resultantly, the contract remains silent.
If the transaction completes on this basis, then over £160,000 of plant and machinery could be lost.
The seller has an entitlement to claim integral features, a category of plant and machinery introduced in April 2008 that is only available to subsequent owners of commercial property. The seller isn’t aware of this because they hadn’t received correct advice, but the buyer is ultimately the one to lose out. Without the seller pooling these allowances and passing them over, the buyer loses all legal entitlement to claim.
2. Acquiring from a non-tax paying seller
When reviewing replies to CPSEs, we often find that the capital allowances section 32 is populated with either ‘n/a’ or ‘no capital allowances available’. This isn’t ideal but in the case of a non-tax paying seller it is understandable. However, this is only the case from their perspective and doesn’t by any means provide the full picture as to what is available to the buyer.
Let’s say a pension fund (non-tax payer) acquires a property and there is no requirement to address capital allowances as part of the transaction, so the contract remains silent. The pension fund (rightly from their perspective) informs the buyer that there are no additional allowances and proceeds to the sell the property for £7m.
In this situation, the buyer could lose up to £2,500,000 of allowances.
If the buyer doesn’t carry out the necessary due diligence, they will miss the fact that they could claim integral features that aren’t available to the pension fund. The buyer has what we call a full and unrestricted claim, but this would only be discovered if historical ownership due diligence is carried out to find that the previous owner to the pension fund hadn’t claimed capital allowances.