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Property Purchases and CT return inclusion

Property Purchases and CT return inclusion

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I have a bit of a conumdrum and not sure how to proceed.

I have 2 clients who have both purchased a property (1 is commercial the other is residential) with the intention of renting them out - both are in Ltd company's. I am treating the properties as assets in the same way as a van or computer system and therefore depreciating them (over 25 years).

On preparing the accounts and company tax return it occurs that I would include this on the capital allowances section and claim CA's accordingly as I would any other asset but I am in 2 minds as to whether this is the correct treatment. The return indicates that they should be grouped in the Integral Features section and CA is claimed at 8%.

What are your thoughts?

Replies (11)

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Hallerud at Easter
By DJKL
15th Sep 2015 16:26

On what are you proposing to claim capital allowances?

Have you considered FRS102 re the investment properties going forward or are you sticking with FRS105; do the clients have a view?

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By Tim Vane
15th Sep 2015 16:54

Have you identified what the integral features are? Has the seller pooled the expenditure?

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By Marsh1
15th Sep 2015 20:54

I'm not sure if i have misunderstood your question, but you are aware CA are not claimable for the purchase price of the properties, they are not plant and machinery.

New rules since 1st April 2014, mean you can claim for the fixture and fittings of the property being pooled as integral features as long as this has been done prior to the sale.

 

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By Tim Vane
16th Sep 2015 09:45

Gosh

Marsh1 wrote:

I'm not sure if i have misunderstood your question, but you are aware CA are not claimable for the purchase price of the properties, they are not plant and machinery.

Just re-read the OP and on second reading it does come across as trying to claim P&M CA on buildings, rather than integral features. Worrying!

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By JCresswellTax
16th Sep 2015 10:03

I am not an accountant

But do you depreciate properties?  So in 25 years, they will be worthless?

This doesn't seem right to me.

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By johngroganjga
16th Sep 2015 11:48

Depreciation

JCresswellTax wrote:

But do you depreciate properties?  So in 25 years, they will be worthless?

This doesn't seem right to me.

Yes you depreciate buildings (but not the land on which they stand), unless (under current standards) they are held for investment purposes. 

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By AndersonAccountancy
16th Sep 2015 10:38

Thanks for your replies guys. Like I said, this is the first time I have come across properties and with 2 clients as well - great fun and useful learning curve.

I was thinking along the lines that the properties were assets like P&M and will therefore depreciate them in the accounts (depreciation is about allocating the cost of the asset over useful life, @JCresswellTax, not assessing it's value - naturally, the client is at liberty to revalue the asset at a later stage and this can be written into the accounts) as I would any other asset and both FRS102 & 105 seem to support this. Re: investment; it doesn't look like either building can fall into this category - 1 is residential let out to students and the other is owner occupied commercial.

My confusion was not so much the accounts but more the CT return. When entering the purchase, I initially put it into long life assets but the software moved it to integral features which is obviously not the right place. But, if Marsh1 is correct and you cannot claim CA's on the purchase of properties, then I will need to remove it from the CT - I am waiting for HMRC technical to come back to me on this one.

So that would then present another problem; if you charge Depn in accounts, this needs to be written back on CT tax comp which could result in the client paying CT as there is no off-set.

Does this make sense?

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Hallerud at Easter
By DJKL
16th Sep 2015 11:19

You need to think carefully about depreciation/status

AndersonAccountancy wrote:

Thanks for your replies guys. Like I said, this is the first time I have come across properties and with 2 clients as well - great fun and useful learning curve.

I was thinking along the lines that the properties were assets like P&M and will therefore depreciate them in the accounts (depreciation is about allocating the cost of the asset over useful life, @JCresswellTax, not assessing it's value - naturally, the client is at liberty to revalue the asset at a later stage and this can be written into the accounts) as I would any other asset and both FRS102 & 105 seem to support this. Re: investment; it doesn't look like either building can fall into this category - 1 is residential let out to students and the other is owner occupied commercial.

My confusion was not so much the accounts but more the CT return. When entering the purchase, I initially put it into long life assets but the software moved it to integral features which is obviously not the right place. But, if Marsh1 is correct and you cannot claim CA's on the purchase of properties, then I will need to remove it from the CT - I am waiting for HMRC technical to come back to me on this one.

So that would then present another problem; if you charge Depn in accounts, this needs to be written back on CT tax comp which could result in the client paying CT as there is no off-set.

Does this make sense?

I had thought from your first post that both clients intended to lease the properties to others, hence I thought possibly treating them as investment properties might be sensible, your later post suggests one is using the building within their own business the other is renting to a third party.

Firstly, whatever policy you do set as depreciation will impact the distributable reserves of each company, this may not be important but you ought to think about the possible issue re future dividend requirements/tax planning. Where the property is an investment property if you adopt FRS102 then no depreciation will be required. This will obviously not be on point re the own use company, but here you might want to consider what part of the cost is the land and what part the building, it is only the building that possibly needs depreciated. Whilst no absolutes re term over which to depreciate imho 25 years is at the low end of the spectrum for a building (though if a steel shed/similar may be appropriate) but most buildings have a useful life over 50 years (I hope they do, my house was built in 1869)

Anyway some food for thought re your client's/your decision making.

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By Tim Vane
16th Sep 2015 10:51

There is no point in waiting for HMRC technical to come back to you on the CA - it is not P&M plain and simple, so no CAs if no integral features. So yes you add back the depreciation and the client pays CT on the full taxable income.

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By AndersonAccountancy
16th Sep 2015 11:40

Thanks...

Tim Vane wrote:

There is no point in waiting for HMRC technical to come back to you on the CA - it is not P&M plain and simple, so no CAs if no integral features. So yes you add back the depreciation and the client pays CT on the full taxable income.

Many thanks Tim - and everyone else; knew I could rely on the AW community :)

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By plummy1
16th Sep 2015 16:38

Capital Allowances

I have to disagree with some of the comments being made here with regard to capital allowances. Firstly P&M is a broad term which covers "Integral Features" as well as other "Fixtures" in a property. The point of highlighting Integral Features as a separate category is just that they have to be pooled in the "Special Rates Pool"

If the vendor of the property purchased it before the relevant integral features legislation came into effect in April 2008 then your client will be able to claim for the integral features on the basis that the previous owner would not have been able to. These integral features could then be claimed for on the basis of your clients expenditure on the property. 

Your client may well have been able to claim for other "fixtures" in the property based on the vendors original expenditure on them but the opportunity to sort this out has probably been lost because they have completed on the property. There is a chance, but it is highly unlikely, that the solicitor included clauses in the contract which would call for the vendors co-operation in helping your client claim for these fixtures.

If your client was able to claim the integral features they would, in my opinion. need the assistance of capital allowances claims specialists to undertake a "just and reasonable apportionment" of the purchase price. 

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