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Capital allowances for fixtures: new rules

13th Apr 2012
Director Gateley Capitus
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From April this year, businesses acquiring property must take care not to inadvertently overlook a valuable tax relief, explains The Capital Allowances Partnership’s Steven Bone.

The relief in question is capital allowances, and due to new legislation, making a capital allowances claim for fixtures has become more difficult.

Capital allowances give tax relief to property owner-occupiers and investors for expenditure on so-called plant and machinery. They allow all of the expenditure to be written-off over time - the allowances being given at various rates ranging from 100% down to 8%. 

However, it is not always realised how broadly the relief extends to fixtures inherent in the fabric of buildings, such as mechanical and electrical services, and furnishings and fittings. The tax savings depend upon the business's tax rate and property type (some properties being more plant-rich than others). However, typically tax savings are in the region of 5-10% (and as much as 25%) of the money spent to build or buy the property. 

This tax saving risks being lost if the new rules are not fully understood.

The long-standing position

It has long been the case that to claim plant and machinery allowances, a property buyer has simply had to demonstrate that they meet the basic requirements set out in the Capital Allowances Act 2001 (CAA 2001). That is, they have incurred capital expenditure on the provision of plant or machinery for business purposes and own (or are deemed to own for tax purposes) the plant in question. By default the claim is based on a CAA 2001 s 562 “just and reasonable apportionment” (that is, a market value apportionment of the purchase price). This involves a specialist tax valuation using a well-established methodology, which may be checked by HMRC or the Valuation Office Agency. 

To prevent double-claiming, where the seller has claimed allowances, the seller must enter a disposal value in its tax return (also based on a s 562 apportionment of the sale price, but limited to their original claim value). And, to prevent 'ramping up' of relief on those assets the buyer's claim is limited to the seller's disposal value. 

Where a prior owner has not claimed, which is commonplace for properties in the hands of smaller owner-managed vendors, then the buyer's claim is based on an unrestricted s 562 apportionment. An example, is recently qualifying assets such as electrical lighting and power, cold water and external solar shading (first designated as 'integral features' plant from April 2008).

Alternatively, since 1997 the seller and buyer have had the option of agreeing a CAA 2001 s 198 joint election (s 199 for leases). This establishes the disposal value of plant fixtures upon which the seller has claimed capital allowances. It cannot include assets upon which the seller did not claim. An election is generally advantageous for a seller but a bad idea for a buyer because it usually results in a negotiated compromise where, despite selling the assets, the vendor is able to keep valuable tax allowances which would otherwise transfer by default to the buyer.

New rules with immediate effect – the “fixed value requirement”

However, from 1 April (corporation tax) or 6 April 2012 (income tax) a new obstacle has been introduced by s 43 and schedule 10 of Finance Act 2012. This is called the "fixed value requirement". 

Where the seller has claimed capital allowances for fixtures, within two years of the transaction completion date, the seller and buyer will either need to:

  • make a valid s 198 (or 199) election - which it is intended should reflect a market value 'just and reasonable' apportionment but may be for a lower amount
  • either of them can unilaterally refer the matter to the Tax Chamber of the First-tier Tribunal for an independent determination

A key point, which has been misreported on occasion is that an election is not mandatory. The government's preference is that an election should become the norm and a standard part of all commercial property sale and purchase agreements. And, of course, consensual agreement will ordinarily be in both parties' interests - if the value is fair. 

However, HMRC has put on record that the freedom to elect for less than market value should not be seen as detracting, in any way, from the underlying statutory right of either party to insist on a just and reasonable apportionment.  Establishing the disposal value is not a seller's prerogative. If, for example, the seller is not playing ‘fair' and seeking to impose a lower value on the fixtures than would result from properly applying the underlying statutory rules (for example, an apportionment) then the buyer can take this into account in the price offered for the property, or refer the matter to the tribunal. HMRC has indicated that a tribunal hearing is not something that should be feared, nor should it be prohibitively costly in terms of time or money.

If the fixed value requirement is not met (because there is neither an election nor a tribunal determination) then the result will be catastrophic for a buyer. Not only will the buyer never be able to claim any capital allowances, but should the property subsequently change hands, neither will any future owner of those fixtures. This is expected to adversely affect the market price of affected properties.

New rules with delayed effect – “mandatory pooling”

The rules above only apply where the seller has claimed capital allowances. It is therefore crucial, at the pre-contract stage, to establish whether that is the case. In practice, sellers may have claimed on some assets, but not on others. The more information the buyer can obtain, the better it will be for maximising his own claim.

From April 2014 the rules are being toughened further so that even where the seller has never claimed any capital allowances, it will be required to pool the expenditure (that is, formally notify it to HMRC in a tax return). This is called the "pooling requirement". 

This means in such cases that before the buyer will be able to claim any capital allowances, it will, in effect, need to get the seller to go through the motions of claiming capital allowances (that is, pool the qualifying expenditure, but not claim any writing-down allowances) and then agree to pass these on (or to force this via a Tribunal determination). This is a sure-fire recipe for additional cost, disagreement and delay.


On a £500,000 property purchase, with capital allowances typically saving £25,000 to £50,000 (and as much as £125,000), failing to apply these new rules properly will prove costly to property buyers. 

Conveyancing advisers often have limited knowledge of capital allowances, so it is important that accountants and tax advisers should alert clients to this issue and, where appropriate, recommend a capital allowances specialist is consulted. Whether an election, or tribunal determination is opted for, a buyer would be wise to commission specialist capital allowances advice and a valuation to use as the basis of negotiations regarding the election, or to present at the tribunal. The sooner this is dealt with, the better (ideally at the time of the deal). Good advice should pay for itself many times over.

Steven Bone is a tax-qualified chartered surveyor and director of The Capital Allowances Partnership Limited.

Replies (1)

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By plummy1
16th Apr 2012 16:03

There may be trouble ahead

An excellent summary of the new legislation.

I can see all kinds of potential here for disagreements between property buyers and their professional advisers. Many solicitors have in the past advised clients to speak to their accountants but by the time the client gets round to it the property transaction has been completed. In the future it will not be advisable for the solicitor to take this route because the issue of a capital allowances claim should be dealt with as part of the pre-contract negotiations. The sellers solicitor should liase more closely with the sellers accountant to obtain the capital allowances claims history on the property and the buyers solicitor will have to make sure they obtain the information.

It will be interesting to see how this plays out in practice as I don't think many commercial property conveyancing solicitors will be up to speed with these changes.


John Plumridge


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