Have the connected persons rules for capital allowances penalised this tax payer?

Have the connected persons rules for capital...

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Hi all, does anyone know if there's any way round the anti-avoidance legislation biting here?

A new client has just bought a property from an elderly family member, who needed to divest but had failed to sell on the open market.  The seller is a long retired former solicitor and a stickler for rules, so the transaction was done at a professionally agreed valuation, to be sure of market value for CGT purposes.  My client's intention is to run an FHL business and he wishes to claim capital allowances.

It seems that CAA2001 s214-217 will prevent him from claiming AIA on purchased plant & machinery, even though there's no intention to exploit rules to claim excess allowances.

Furthermore, it seems, there is no opportunity ever for him ever to claim allowances on integral features, because the connected previous owner bought pre 2008 (FA2008, Sch26,  para15.)

I assume that he can pool the plant & machinery and claim writing down allowances, but must wait until he sells the property to deduct costs of integral features in his capital gains calculation.

Am I correct in my understanding that despite there being no intention to avoid tax/abuse legislation, the buyer is automatically penalised for buying from a connected party?  And importantly, are there other provisions I may have missed which prevent normal tax allowances and reliefs being available as an unfortunate consequence of connected party rules. I don't relish telling him the bad news, but thank you wise ones if you are able to share your interpretations.

Replies (10)

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By plummy1
24th Aug 2013 17:02

Could you please clarify?

Hi Jim,

Could you clarify the nature of the property when it was purchased by your client? Reading between the lines it sounds like the property was "residential" and is only now likely to become "commercial" once it is used as a furnished holiday let. Is this the case?

Regards

John 

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By JimH
24th Aug 2013 19:24

Clarifying
Thanks John

It was taxed under residential property letting rules, though subject to business rates.

And so no capital allowances were claimed. I've therefore assumed s198 election is not applicable... or are we required to look back through the history of previous owners to see if capital allowances have ever previously been claimed (it was let to holidaymakers prior to first ownership by any member of this family, but I'm not aware of the basis).

Can my client, who has recently completed, refer to the FTT for a determination to fix the value in order to claim capital allowances on the purchase ... where, in any case, a chunk of the potential benefits have been eliminated or delayed by the connected party rules? Or is all lost - regardless of the connected party issue? I'm unsure if my client has some leeway in the transition period post FA 2012. Thank you for your question flagging to me that s198 is potentially unavailable.

I'm a bit green here, so very much appreciate your comments.

Jim

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By JimH
25th Aug 2013 01:02

Think I've found your answer to my second post ...
...here:

https://www.accountingweb.co.uk/blog-post/why-accountants-should-act-now...

from which I understand that a just and reasonable apportionment of purchase price can still be used for post 2012 purchases of properies on which capital allowances have never previously been claimed; but the onus is on my client as buyer to establish all previous owners' histories of capital allowance claims. So if the right questions have never been asked and no s198 elections ever made when they should have been - is all lost?

Reverting to my original query on whether there is a way round the connected party anti-avoidance legislation - I've not given you a chance to respond. But how helpful of HMRC guidance in CA28200 - CA28300 to state:

"These anti-avoidance provisions should be read in the context of the mischief against which they are aimed. The purpose of the legislation is to prevent the acceleration or uplift in capital allowances on a sale between connected persons"

There is no such mischief in the transaction here, but I've not found a mechanism by which this can be demonstrated to and accepted by HMRC. I'd love to be told I'm wrong, but I think my client is restricted to WDAs on fixtures and fittings and no capital allowances on integral features?

Thanks John!

regards
Jim

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By plummy1
25th Aug 2013 07:55

Intention of the Parties

I don''t believe It was the intention of the legislation to capture this type of transaction i.e. the purpose of the transaction is not to accelerate the claiming of capital allowances. Yes you would still need to research any capital allowances claims history to see whether a previous owner had made a claim but if so this may only restrict entitlement rather than negate a claim altogether.

Has your client purchased the property through a formal purchase contract by the way? Also there is no interaction between capital gains legislation and capital allowances. 

A couple of other things to consider are that you  will not be able to claim capital allowances on the property until it meets the qualifying criteria for a furnished holiday let and also since April 2011 you have not been able to use any losses within the fhl business to provide sideways tax relief  on any other income. You may well have known these points but I thought it was worth mentioning.

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By JimH
25th Aug 2013 10:25

Formal purchase contract
Thanks John.

It will be pleasing if I don't have to give the client more bad news - as, you're spot on and i've already had to correct the mate-down-the-pub misinformation on loss relief.

My understanding is that formal contacts were signed this week ....

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By plummy1
25th Aug 2013 11:09

Qualifying Transaction

Hi Jim,

I'm now thinking this doesn't meet the requirements of a qualifying transaction under the new capital allowances rules as basically it is the sale of a residential property. As yet it doesn't sound likely that there has been a capital allowance claim in the past and for all intents and purposes no assets are transferring which at the time of the sale would qualify for capital allowances because there is no qualifying trade on either side.

I hope this helps.

Regards

John

 

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By JimH
25th Aug 2013 14:16

so may need to caveat claims
Thanks, John

Where are you looking? Can't the property prove to be an FHL from the first second of ownership (12 months down the line, when qualifying conditions have been met?). It was let immediately before, during and after the transaction at premium summer rates through a letting agent - does this info change your view re qualifying trade at purchase?

I will explain the risks to client and propose a claim though unsure of mechanism under transition rules post FA2012 for fixing the value/writing statements in absence of previous owners' claiming CAs. I don't think either the s198 or FTT determination route can apply.

I'm still concerned the connected party rules will bite regardless of no mischief intention - I think Steve Bone raised this thought in anticipation of new legislation wording. Can one else challenge my concerns?

So claim, but warn client of challenge along the line?

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By plummy1
26th Aug 2013 01:11

My thoughts.

You can only claim capital allowances on an fhl once it meets the qualifying criteria so until you have evidence of this you cannot make a claim. Usually the qualifying criteria are measured for each individual tax year.  

Where a claim for capital allowances has not previously been made on a property then then the claim will not be affected by the changes that came into effect in April 2012 I.e the buyer can make a claim based on a just and reasonable apportionment of the purchase price. This changes in April 2014.

Personally I think because the vendor was never in a position to claim capital allowances the purpose of the transaction could not be interpreted as being one designed to accelerate a claim for capital allowances. If anybody has a different opinion I would like to hear it as well. 

 

 

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By ACWain
02nd Sep 2013 16:48

Ltd coy filing

Has anyone experience of using the HRMC website for filing very small Ltd Coy A/C,s .I use Iris,very good but expensive when you only have a few coys?

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By JimH
04th Sep 2013 07:33
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