Capital Allowances - The New Rules In Action
We have now been living with the full capital allowances rules introduced by FA2012 for over a year so I thought it might be interesting to look at a recent case study. This case study highlights how our work has changed and also the invaluable role of the accountant in advising their client. I hope that by writing this case study it may help other accountants recognise the potential opportunities for their clients before they complete on the purchase of a commercial property.
Our client was purchasing a large warehouse for £1.4m in January 2015 and had been advised to contact us by their accountant who new they were planning to make the purchase. Therefore we were lucky to be able to get involved before completion had taken place.
We were able to talk to our client's solicitor who had already ascertained the vendor had not claimed capital allowances on the fixtures within the property. We in turn were able to investigate the ownership of the property prior to the vendors acquisition and ascertain that the previous owner had not been entitled to claim capital allowances.
There were a number of issues which had to be resolved to make sure that our client received the maximum capital allowances benefit possible. Namely:-
i) The vendor would have to agree that a capital allowances calculation was undertaken based on their original purchase expenditure (circa £750,000) in 1998 i.e. meet the "fixed value requirement"
ii) The vendor would have to agree to pool these capital allowances in their accounts in the tax year the property was being sold.
iii) The vendor would have to agree to enter into a Section 198 Tax Election Agreement with our client and pass on all capital allowances over to them.
iv) They would agree to undertake all of the above at their own cost.
We were able to advise our client's solicitor with regard to the appropriate clauses and warranties to be placed in the purchase contract. These committed the vendor to provide the necessary information for us to undertake the required capital allowances analysis. We were then also able to raise the Section 198 Tax Election Agreement which was signed by both parties. All this was able to take place after completion because of the commitments made by the vendor in the purchase contract.
The claim for capital allowances based on the vendor's original expenditure produced capital allowances of circa £101,000. However because the vendor had purchased the property prior to April 2008 we were able to undertake a separate claim for Integral Features for our client based on their expenditure of £1.4m. This produced a further claim of circa £54,000 meaning a total capital allowances out turn of £155,000.
Our client was therefore able to claim £155,000 of capital allowances for the year by utilising the AIA. As they are a 20% tax payer this equates to a total tax saving of £31,000. Lastly it should be noted that if we had not been asked by the accountant to get involved before their client completed on the property the likely maximum we would have been able to claim would have just been the Integral Features element of £54,000.
I hope this case study proves useful to any interested party whether they are an accountant, solicitor or potential property purchaser.
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After failing at and early age to make a living by playing guitar, I started a career helping clients to save money and become more efficient. In 2009 I set up Curtis Plumstone Associates to concentrate on undertaking Capital Allowances Claims on Commercial Property. My business partner is a Deloittes trained expert in this field and my job is...