By Dean Needham, Senior Capital Allowances Analyst at Catax.
Capital Allowances When A Property Is Sold
Following the case study discussed by Mark in last month’s Tax Talk; this month we are providing more detail on the correct way to deal with Capital Allowances during the sale of a property depending on whether these allowances have been claimed previously.
See below a simple illustration of the options available for Capital Allowances when a commercial property is sold:
The sooner the better
As stated previously by Mark, the sooner the Capital Allowances position is clarified in a sale process the better. If Capital Allowances are not addressed during the sale negotiation it can be extremely difficult to obtain the seller’s co-operation to establish a Capital Allowances claim post completion. As the seller is no longer engaged and there is no financial incentive for them to revisit the Capital Allowances position, we often find they are reluctant to even engage in communication.
No Capital Allowances have been claimed previously
There are two scenarios that require different actions for how Capital Allowances should be addressed when a property is sold. Option 1 is the scenario described in Mark’s case study.
This is where no Capital Allowances have been claimed previously by the seller. If Catax is instructed by the buyer, we will supply clauses in the contract which state the maximum value of Capital Allowances will be passed over to the buyer and that the seller will cooperate in supplying information to substantiate the claim.
Capital Allowances have been maximized previously
Just as important, if not more so, is where Catax has acted for the seller. In this scenario Catax has previously identified all available Capital Allowances at a property and the client has been enjoying the benefit of the Capital Allowances for a number of years.
At the point of sale, it is vital that the client decide how they will treat the remaining unclaimed Capital Allowances.
Option 2 – which Catax recommends for clients that are selling their property, is retaining the benefit of the Capital Allowances when the property is sold. This is done by completing an s198 election form with the value of £2. This essentially restricts any Capital Allowances claim the new owner can make to £2 and allows the former owner to continue to claim the Capital Allowances that Catax have identified even after the disposal of the property.
Option 3 – the client can pass over any unclaimed Capital Allowances to the new owner, this is done by completing an s198 election form with the tax written down value (TWDV) of the Capital Allowances at the point of sale. This could be a point of negotiation and will make a property more desirable to potential property investors.
Be aware! It is vital that the s198 election does not detail a value higher than the TWDV of the Capital Allowances at the point of sale. Doing so would cause a claw back of the allowances already claimed.
The two-year deadline
If the Capital Allowances position is not addressed before completion, there is a danger that any unclaimed Capital Allowances can be lost forever and, even worse, any claimed Capital Allowances could be clawed back. There is a two-year deadline from the date of completion in order to supply a HMRC officer with a completed s198 election to either pass Capital Allowances to the new owner or for the prior owner to retain the benefit of them, if this is not done then the ability to establish Capital Allowances is lost.
To supply a HMRC officer with the election form, it simply needs to be included with the tax return for the year of property disposal/acquisition when it is submitted.
Although this two-year window is useful to ensure Capital Allowances do not delay completion of the purchase, without the correct treatment in the contract it can be difficult to settle the subject of Capital Allowances post completion and can result in dire consequences whether Capital Allowances have been claimed previously or not.
Whether it is a previous client of Catax that has already maximized Capital Allowances or it is someone that is about to buy/sell a commercial property where Capital Allowances have never been claimed, it is preferred that these are addressed at the contract stage. The technical team here at Catax are on hand to advise on all scenarios, so, get in touch.