Carmen Morrison, Senior Capital Allowances Analyst, has provided insight into a new tax relief known as Structures and Buildings Allowance (“SBA”), a regime introduced by the UK Government in the autumn budget of 2018.
SBAs are part of the Capital Allowances regime and were introduced to stimulate investment with regards to capital expenditure on the construction of new buildings or improvement works to already existing buildings. The relief entitles tax payers to claim tax relief on expenditure with regards to structural works on commercial property at 3% per annum for 33 and 1/3 years (the relief increased from 2% per annum from April 2020).
Previously, tax relief with regards to construction and improvement works was limited to expenditure on installations such as water, electrics, heating, ventilation, sanitary-ware and other plant and machinery or fixtures and fittings. However, as the largest portion of expenditure on such projects are generally in relation to the structural works themselves, this can be seen as a welcome tax relief for taxpayers who invest in commercial property.
As with most tax reliefs, there are certain criteria that need to be met for the expenditure to qualify for the relief. For SBAs these are; entitlement, the commencement date, the qualifying activity and qualifying expenditure. Each of these are discussed below:
For a taxpayer to claim SBAs they must have a relevant interest in the property on which the structural works were carried out. This could be by way of a freeholder or leaseholder. The leaseholder must have a minimum lease term of 35 years or more.
The relief is available provided all expenditure and relevant contracts for the works were signed on or after 29 October 2018. If works had not begun but the agreement for the works to be carried out had been signed before this date, SBAs would unfortunately not be available. The property would also have needed to commence its qualifying activity before SBAs could be claimed on the expenditure incurred.
For expenditure to qualify for SBAs, the taxpayer needs to be carrying out a qualifying activity. These are similar to the qualifying activities carried out when claiming other capital allowances however for SBAs, expenditure on furnished holiday lettings are excluded for claiming the tax relief. Qualifying activities for SBAs are listed below:
Although there is no specific definition as to what is classed as a structure, HMRC states that “you should treat something as a structure if it has been erected or constructed and is distinct from the earth surrounding it. Areas that have undergone construction works such as underpinning structural works are structures.”
Some examples of expenditure qualifying for SBAs are as follows; walls, floors, ceilings, doors, gates, shutters, stairs, windows, car parks, roads, tunnels. SBAs are also available on expenditure that is incidental to the structural works being carried out such as; fees for design and preparing the site for construction.
SBAs cannot be claimed on the expenditure relating to land, landscaping and items qualifying for other reliefs such as expenditure on plant and machinery or fixtures and fittings therefore detailed capital allowance analysis is still required with regards to the expenditure on construction or improvement works projects.
Sale of a property (not including sales from a developer)
If the property is sold, any unclaimed SBAs can be transferred to the buyer. For “ordinary” capital allowances, in most cases there is a 2 year time limit to arrange an election to transfer unclaimed capital allowances between the vendor and the buyer. If this time limit is passed, unclaimed capital allowances are lost. SBAs are different to this, the only condition to be able to transfer the SBAs is that an Allowance Statement has been completed and is transferred to the purchaser with the details of the expenditure in question. There is no election required to be submitted therefore SBAs are no effected by the 2 year time limit.
The SBAs are restricted to the lower of:
SBAs must be claimed in a chargeable period. If, for any chargeable period, the SBA is not claimed, it is lost and cannot be claimed in any other chargeable period.
Purchased from a developer
As developers are unable to claim capital allowances, if a taxpayer purchases a property unused from a developer, the taxpayer is able to claim SBAs on the price they paid (after deducting items they cannot claim SBAs on such as plant and machinery, fixtures and fittings and land etc).
Capital Gain Implications
When a property is disposed, for the plant and machinery or fixtures and fittings that are being disposed within the property, the tax payer can retain the tax relief already received on these assets even after the disposal of the property, i.e., there is no requirement to repay the tax relief already claimed.
Where a vendor has claimed SBAs and disposes sell of the property, the claim for SBAs will end. Unlike other capital allowances, if the property is disposed of, the tax relief received to date with regards to SBAs is to be repaid via increased capital gains as SBAs claimed are to be added to the disposal receipts to calculate the capital gain or loss. Dependent on the tax rates applicable at the time of the sale, the tax liability may be higher or lower than the tax relief claimed by way of SBAs up to that point in time.
Structures and Buildings Allowances give the taxpayer the opportunity to claim tax relief on some of the largest expenditure with regards to construction or improvement works which previously was unavailable. The taxpayer should however keep in mind that if they come to dispose of the property, they may have to pay more Capital Gains Tax as SBAs claimed are to be added to the disposal receipts to calculate the capital gain or loss.