Entitlement reports for non-taxpayers

This case study highlights how preparing an entitlement report can save time for both the seller and future buyer when a property changes hands.

Summary

A non-tax paying fund purchased a new low carbon, zero fossil fuel office building in London for £25 million. The property had been newly redeveloped behind the retained facade and was designed to be exceptionally energy efficient. With the most efficient Energy Performance Certificate (EPC) rating of ‘A’, the building doesn't use any fossil fuel, its hot water and heating is provided by air source heat pump technology, and solar photovoltaic panels contribute to electricity.

Our client bought the property from the developer and recognised that whilst neither the seller (the developer) or the buyer (the non-taxpaying fund) could claim any capital allowances for their expenditure, it was important to preserve the capital allowances for a future owner because the value could be significant.

How did we help?

We provided a report summarising the potential for a future buyer to claim capital allowances.

A report can be prepared for the purchase, development or refurbishment of a property. Its purpose is to capture and summarise relevant information from the time of the transaction, that will enable a later owner to claim the maximum amount of capital allowances available to them if they buy the property.

Entitlement reports: on the purchase of a property

The report documents the position of the buyer and any prior owner whose capital allowances treatment could affect a later owner. In the example above, the only prior owner was the developer who had held the property as trading stock.

Entitlement reports: development or refurbishment of a property

The report collates construction cost information and documents the works carried out by the seller. This includes expenditure eligible for structures and buildings allowances, and important dates for capital allowances purposes such as when contracts were entered into and when assets were first used.

Why should a non-taxpayer obtain an entitlement report?

When the time comes to sell the property, the entitlement report is already available and can be included with the suite of legal documents to help inform the buyer about their entitlement to obtain capital allowances on their purchase of the property and the value potentially involved.

This provides full disclosure of the capital allowances background based on information retained from the time of the seller’s expenditure, therefore, streamlining and reducing questions from perspective purchasers and their advisors. The legal team can also use the report to readily provide meaningful replies to the Commercial Property Standard Enquiries about capital allowances (conveyancing form CPSE.1 Enquiry 32) and enable a clear capital allowances position to be agreed in the Heads of Terms and the Sale and Purchase Agreement.

Finally, the entitlement report may assist prospective buyers secure finance for the purchase of the asset by demonstrating to their lender that significant tax relief should be available on its purchase, which will improve their cashflow and strengthen their ability to meet loan repayments.

Conclusion

Preparing an entitlement report early is a proactive approach. It saves time for both the seller and future buyer when a property changes hands. Instead of investigating the potential for capital allowances many years after the original transaction, which can prove difficult, it removes uncertainty and provides clarity about what tax relief may or may not be available to a buyer.

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