Capital Allowances and nursing homes
Steve inquired if anyone had had dealings with companies looking at submitting revised capital allowances claims on nursing home properties. Clients have been approached and advised that any revaluation/restructuring of capital cost on purchase is allowable for extra capital allowances. They have also been advised that on subsequent sale of the property any extra allowances will not be deducted in calculating any capital gains. Is this too good to be true? This query had a bumper number of replies.
Euan MacLennan had not encountered this scenario. However, he queried whether clients are being told that they can unilaterally amend the purchase agreement between goodwill, property, plant and machinery and stock. If more cost can be attributed to plant and machinery then the client could claim extra capital allowances, and this will not affect the future capital gains position. However, any balancing charge on sale could claw back some of the previous capital allowances granted.
Paul Soper mentioned that the (now defunct) firm of Arthur Andersen used to have a department that specialised in this activity. The legislation allows the vendor and purchaser to jointly elect division of values, but doesn’t state that the value of the one party will be automatically the same as the other party. In the absence of an election there is nothing to prevent the purchaser making a just and reasonable apportionment. If it is done within 13 months of the acquisition, the claim could be boosted by claiming back up to 4% SLDT as well, as boosting the value of plant and machinery will reduce the value of the property. Reduction of the property value would affect future capital gains.
To avoid problems on acquisitions, it used to be said that HMRC would accept whichever computation was submitted first!
Steve Bone observed that such capital allowances claims are routine practice and uncontroversial, but are nevertheless a specialist task. He suggests that Steve checks out the website www.cap-allow.com. FAQ 9 is helpful in advising the client and choosing a specialist. A good specialist will work with Steve and the client and carry out a free of charge up-front review to assess whether a claim is possible and what the value might be.
Steve underlined that on a purchase of a second-hand nursing home a claim for capital allowances of plant and machinery is possible, and the purchaser is not bound by the vendor’s division of the sale price, even if it is included in the sale contract. It is also perfectly possible to go back indefinitely to claim capital allowances (effectively by treating the plant as additions to the general pool in a later period), as long as the assets are still owned in that later period. For example his firm has recently successfully agreed claims with HMRC for unclaimed expenditure going back to the 1980s.
Paul Soper commented that the apportionment of the contract (presumably by the vendor) is not binding because the law requires a just and reasonable apportionment for both capital allowances and SDLT.
He also mentioned that Steven Bone seems to be ignoring section 41, which will restrict losses by reference to capital allowances given. The most likely CGT outcome for plant and machinery, especially in the fullness of time, is that the items will be scrapped. Thus the giving of allowances doesn’t affect a gain but that is because there would be a claw back of allowances by balancing charge or restriction of pool values up to the amount of cost. So the reassurance about gains that advisers give is not strictly correct.
Jim Greenwood observed that what the consultants will be doing is to ascertain how much of the building can qualify as plant. The base cost of the building is only restricted for the capital allowances claim if the building is sold at a loss.
If the parties have made a claim under section 198, CAA 2001, then that is final for the plant in the building. If they have not made the claim, the legislation states that the terms of a contract can be overridden if a different apportionment gives a just and reasonable result. It is obviously designed to prevent vendors and purchasers overloading one part of the expenditure to obtain a tax advantage but it can be used in another way. HMRC will argue to have the vendor and purchaser using the same apportionment.
Steve Bone stated that in the absence of a section 198 claim (which is generally inadvisable for a buyer), by default a just and reasonable apportionment is required for capital allowances by section 562, CAA 2001 and for SDLT by para. 4 of Schedule 4 to the Finance Act 2001. As long ago as 1955 it was held in the High Court that contract allocations are not binding (see Fitton v Gilders and Heaton 36 TC 233).
Jane Martin stressed that it is very easy to get lost in the technicalities and jargon of a claim. The concept of capital allowances is straightforward but a full claim with all due diligence is a specialist task for which five hats need to be worn – accountancy, tax, property accounting, legal knowledge and aftercare, and all of these need to interact for the claim to be successfully.
It should be noted that the 2008 Finance Act has introduced changes to the capital allowances regime. Some of the plant items within a building previously eligible for the 25% writing down allowance will now only receive the 10% ‘special’ allowance rather than the 20% writing down allowance now commonly available. This reduces the advantage of assessing the division between plant and machinery and building on a property purchase, but the procedure is still worthwhile.
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