s198 elections - why £1?

s198 elections - why £1?

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Hi - what is the benefit of making £1 s198 elections? Why £1?

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By Piltdown Man
12th May 2017 11:00

I have always understood that the £1.00 figure was because that is the smallest amount to appear in a tax return, so can be identified as a specific addition to or disposal from a pool. Incidentally, these days you probably ought to be entering into s198 elections for £2.00; £1.00 for the main pool and £1.00 for the special rate pool. The benefit is mainly for sellers to fix its disposal value for fixtures forming part of the property being sold. Without a s198 election the disposal value is to be calculated using s562 which might give a higher value than desired. New rules make consideration of the s198 election provisions more important for transactions post 31 March 2014.

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Replying to Piltdown Man:
By Ruddles
12th May 2017 11:08

Bearing in mind that it will be the Tribunal that will decide the value in absence of a s198 election.

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Replying to Ruddles:
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By Piltdown Man
12th May 2017 12:04

The Tribunal may not always be involved. Their involvement arises only if one of the parties makes an application within the time limit.

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Replying to Piltdown Man:
By Ruddles
12th May 2017 12:22

And if an application is not made in time ... ?

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Replying to Ruddles:
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By Piltdown Man
12th May 2017 12:36

s562 applies and HMRC refer to the VOA for the seller's position. Buyer gets no allowances other than perhaps pre-commencement integral features if the new rules dont apply to those assets.

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Replying to Piltdown Man:
By Ruddles
12th May 2017 12:47

Thanks.

Pretty much as I thought. I was being a little vague with my reference to "Tribunal", simply making the general point that if the parties cannot agree by election then someone else will do it for them - possibly, as you say, resulting in loss of allowances for the purchaser.

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Replying to Ruddles:
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By Piltdown Man
12th May 2017 12:56

You're welcome.
The new rules are a bit of a double edged sword, as the Seller may (under s562) get most or all of its allowances clawed back by the VOA apportionment, yet the absence of a valid s198 or an apportioned amount from the Tribunal will result in no (save for possibly pre-commencement integral features) allowances for the Buyer.

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By aidious
12th May 2017 13:12

I've never really understood the blanket £1 allocation to P&M either. If I was a trader who was continuing to trade after the sale of the property, I'd like the sale proceeds taxed over a longer period (i.e by reducing my capital allowance pools) rather than in full as a capital gain, unless of course I had loads of capital losses.

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Replying to aidious:
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By Piltdown Man
12th May 2017 13:39

Not sure I understand your question. The effect for the Seller of the s198 election is to retain capital allowances previously claimed or claimable in future. The Sellers' chargeable gain will be the same if no capital allowances were retained. Retaining capital allowances on fixtures in property is almost always beneficial to the Seller.

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Replying to Piltdown Man:
By Ruddles
12th May 2017 14:11

I understand the question. It is one that is often raised by those that are clueless about the tax treatment of fixtures - and who fail to understand that agreeing how much of the consideration qualifies for capital allowances has no bearing whatsover on the consideration to be brought into account for capital gains tax purposes.

The only potential impact on CGT is where losses are involved (but not for the reason that the above user thinks).

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Replying to Ruddles:
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By aidious
12th May 2017 14:13

That'll be me then!

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Replying to Ruddles:
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By Piltdown Man
12th May 2017 14:17

Its Friday and I have my diplomatic head on!

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Replying to Piltdown Man:
By Ruddles
12th May 2017 14:19

It's Friday afternoon and I've taken mine off

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Replying to Piltdown Man:
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By aidious
12th May 2017 14:11

My understanding of s198 (it may well be wrong) is that the election was to decide how much of the sales proceeds related to expenditure on fixtures (usually £1), and therefore how much related to the building proper (the balance). The balance would then be the proceeds taken to the CGT calculation. Surely any other scenario would result in double taxation on the seller.

Example, say proceeds were £1m. Also say £100k was s198 elected as fixtures. The seller would then be taxed on £100k (via reduction in CA pool). If they are also taxed on the full £1m taxed as a CGT receipt, they have been taxed twice on the £100k. Surely that can't be right?

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Replying to aidious:
By Ruddles
12th May 2017 14:45

Oh dear - your understanding is indeed wrong.

There is no double taxation. Effectively, the s198 value cannot exceed the amount on which allowances have been claimed by a previous owner. So, in your example, the seller would have had to pool at least £100k of qualifying fixtures. If he has already claimed allowances of £100k then the disposal value simply reverses that - net effect £0. If on the other hand no allowances have actually been claimed the disposal value simply cancels the £100k previously added to the pool - net effect £0.

Look at it another way. Some of the expenditure on the property would both qualify for fixtures capital allowances AND form part of the CGT base cost. Effectively, according to your thinking, relief twice for the same expenditure.

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Replying to Ruddles:
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By aidious
12th May 2017 14:31

I see - so the seller can include the cost of the fixtures in their CGT calc, with a possible restriction if a CGT loss arises for net capital allowances claimed in the past?

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Replying to aidious:
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By Piltdown Man
12th May 2017 14:32

Thats it.

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Replying to aidious:
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By aidious
12th May 2017 14:32

Ah yes, you edited your reply and it confirms it. thank you!

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Replying to aidious:
By Ruddles
12th May 2017 14:46

Yes. Although don't confuse yourself by thinking of "including the cost of fixtures" in the CGT calc.

The CGT base cost of the property is (usually) what it was bought for (plus enhancements etc). The CGT consideration is (usually) what it is sold for. The capital allowances treatment is almost entirely separate - the only possible interaction being an adjustment to a CGT loss under TCGA 1992 s41.

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Replying to aidious:
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By Piltdown Man
12th May 2017 14:21

Not quite. The s198 election relates solely to fixtures (i.e. those items that form part of the land) The base cost for the property's CGT calculation includes those fixtures (irrespective of whether capital allowances have been claimed, retained or not). So, effectively capital allowances on fixtures can be claimed and retained without affecting the chargeable gain base cost.

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