The situation is that the client rents what was an empty warehouse. The warehouse is then converted into classrooms and workshops, to enable the teaching of 14 to 16 year old students. We are looking at around a £50k spending for the classrooms etc.
So what would you class the breeze blocks and stud walling etc to be. Yes the building has been improved, so it could be argued that buildings allowance could be applied, but the client does not own the building. Yet if the client moved out, the classrooms etc would have to be removed prior to vacating the property.
I had a similar situation many years ago, but my grey cells are fading slowly and forgotten how I got round this one.
Replies (7)
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Generally speaking a building or structure is capital. It is unlikely that the building or structure will be moveable and no allowances will be due.
There may be some allowances to be had on items fixed to the structure depending on the nature of the items. These items could qualify as plant and equipment or as integral features.
You need to research into what qualifies and consider whether these items are functional within the trade.
Legal ownership of the land or building is not important for the purposes you are talking about.
It's even worse than that
I fear you may not even be able to claim a capital loss. The walls etc will become part of the building and as the client only rents their interest in the property may well be a wasting asset. The allowable expenditure may have to be restricted in the same way as a short lease.
David
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David is right. There is no tax relief on capital leasehold improvements that don't attract capital allowances.
And when knocking them down
The costs of returning the building to original state when vacated at the end of the lease will be allowable I think, looking at the lifespan of this project.
Reading this post about the building work done, makes me wonder if the tax considerations are one reason why movable partitions are popular.
Another option would have been for the landlord to undertake the work and recover the cost through rent - is this too late to arrange? The landlord would at least get the expense allowable for capital gains relief eventually.
RTZ Oil & Gas v Ellis
Unfortunately, if I recall correctly, where there have been capital alterations, the costs of reinstating an asset to its original state also have to be treated as capital; so there would be no deduction available for the costs of taking down the walls.
This does look like one of those rare trades where it could genuinely be argued that partition walls would have to be moved for the purposes of the trade (class sizes and the demands of the curriula may change every term which in turn require changes to the teaching rooms.) and bluemoon makes a valid point there. I think we'll always have the problem persuading clients to consider the tax before spending this sort of money rather than leaving us to try and sort it out after the event.
David