How do capital allowances work during the sale of a property?

The Pooling Requirement generally requires the seller to pool all available Capital Allowances and either retain them or dispose of them to the buyer upon completion. If these allowances have not been identified by the seller (which often happens to be the case) the potential benefit and tax savings will be lost forever if not addressed in time. 

There are different scenarios, each requiring different approaches to how Capital Allowances should be addressed during the sale of a property, which I detail below.

The sooner the better

The sooner the Capital Allowances position is clarified in a sale process the better. If Capital Allowances are not addressed during the sale negotiation it can be extremely difficult to obtain the seller’s co-operation to establish a Capital Allowances claim post completion. As the seller is no longer engaged and there is no financial incentive for them to revisit the Capital Allowances position, we often find they are reluctant to even engage in communication.

Scenario 1: No Capital Allowances have been claimed previously by the seller

If Catax is instructed by the buyer, we will supply clauses in the contract which state the maximum value of Capital Allowances will be passed over to the buyer and that the seller will co-operate in supplying information to substantiate the claim.

Scenario 2: Capital Allowances have been maximised previously

Just as important, if not more so, is where Catax has acted for the seller. In this scenario, Catax has previously identified all available Capital Allowances at a property and the client has been enjoying the benefit of the Capital Allowances for several years.

At the point of sale, it is vital that the client decides how they will treat the remaining unclaimed Capital Allowances.

Option 1 – which Catax recommends for clients that are selling their property, is retaining the benefit of the Capital Allowances when the property is sold. This is done by completing a Section 198 (s198) Election form with the value of £2. This essentially restricts any Capital Allowances claim the new owner can make to £2, and allows the former owner to continue to claim the Capital Allowances that have been identified even after the disposal of the property.

Option 2 – the client can pass over any unclaimed Capital Allowances to the new owner. This is done by completing an s198 Election form with the tax written down value (TWDV)w of the Capital Allowances at the point of sale. This could be a point of negotiation and will make a property more desirable to potential property investors.

Be aware! It is vital that the s198 Election does not detail a value higher than the TWDV of the Capital Allowances at the point of sale. Doing so would cause a clawback of the allowances already claimed.

The two-year deadline

If the Capital Allowances position is not addressed before completion, there is a danger that any unclaimed Capital Allowances can be lost forever and, even worse, any claimed Capital Allowances could be clawed back. There is a two-year deadline from the date of completion to supply a HMRC officer with a completed s198 Election to either pass Capital Allowances to the new owner or for the prior owner to retain the benefit of them. If this is not done then the ability to establish Capital Allowances is lost.

To supply a HMRC officer with the s198 Election form, it simply needs to be included with the tax return for the year of property disposal/acquisition when it is submitted.

Although this two-year window is useful to ensure Capital Allowances do not delay completion of the purchase, without the correct treatment in the contract it can be difficult to settle the subject of Capital Allowances post-completion and can result in dire consequences whether Capital Allowances have been claimed previously or not.

How Catax can support your clients

If you have a client that is about to purchase or sell a commercial property, Catax can support you in ensuring that capital allowances are maximised and addressed at the contract stage. The technical team at Catax is on hand to advise on all scenarios. You can get in touch by calling 0300 303 1903 or emailing enquiries@catax.com.

UPCOMING WEBINAR: Capital Allowances – How AIA and Super Deduction can transform a transaction’s fortune. Register for free here

CATAX
Catax House,
3 Scott Drive,
Hale, Altrincham,
WA15 8AB

0300 303 1903
enquiries@catax.com
www.catax.com