Capital Allowances FAQ

My client is selling the building soon. Surely there is no point in them making a claim as they won’t see all of the benefit?

The whole benefit of the allowances will be realised provided an election is entered into at the point of sale. An election allows you to retain as much of the unrelieved CA pool as you wish (typical elections are for £1 but can be for 50% of the pool or the tax written down value for example).

If the owning entity possesses other commercial assets then the CA pool will not be closed on disposal and the claim will be written down as though you still own the building.

If the owning entity has no other commercial assets then the CA pool will be closed on disposal and the whole benefit of the claim will be realised in the year of disposal and subsequent year, provided that there is sufficient profit to offset this against.

My client is going to transfer the property into a pension, so surely they won’t see all the benefit?

It is tax-efficient to identify unclaimed allowances on a commercial property on behalf of the taxpaying ownership entity prior to transferring it into a pension fund, for the simple reason that taxpaying entities pay tax and pension funds do not.

The practicalities of this are as follows;
1. 1. CA audit carried out and allowances identified by the Sole Trader (Could be any tax paying entity but using Sole Trader in this example)
2. Sole Trader decides to transfer the property into their Pension Fund
3. Property transferred at market value. Allowances transferred for £1 via S198 election, thus allowing Sole Trader to retain the allowances
4. If the claim was £100,000 then the Sole Trader would retain £99,999 and the Pension Fund pays £1 for all fixed plant and machinery within the property
5. Sole Trader can begin to write down the allowances

If the transaction has already taken place there may be the opportunity to “backdate” the election and for the above process to be carried out.

Standard S198 elections give the vendor a two year period in which they can elect to bring the election into account i.e. two years to claim the allowances as set out in purchase contract/election agreement. For this to be a valid option the transaction would need to be between connected parties and have taken place within the last 2 years but each case would need to be looked at on its own merits.

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