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Capital Allowances Claims for Commercial Property in the UK - The Basics

April 08, 2012 | Comments: 0 | Views: 125

Commercial Property owners or those who have refurbished leased property in the UK need to investigate the possibility of a capital allowances claim. There is no down side to making a claim and if not made owners and leaseholders will continue to pay too much tax every year.

This article seeks to answer some of the questions that a healthily skeptical property owner may ask before looking to make a claim.

Is this Legal?

Yes. Capital allowances legislation dates back to the 1870's but the current legislation is The Capital Allowances Act 2001 which is usually amended annually by the Government of the time. Therefore capital allowances are a tax relief enshrined in statute. Furthermore the law is there to encourage commercial property owners to invest in property by providing a source of tax relief.

What are Capital Allowances?

Capital Allowances can be claimed on any expenditure which brings into existence (or improves) an asset with an enduring benefit for the trade. This is a legal definition derived from case-law. The purpose of these allowances is to protect the owner's profits from taxation and reduce their tax bill. It is not uncommon for a capital allowances claim to produce a significant tax rebate and produce significant tax savings within the first five years after the claim has been made.

How does this apply to commercial property including furnished holiday lets?

Commercial property contains fixtures / integral features which may be valued for capital allowances purposes. This includes electrical systems, heating systems, hot & cold water systems, kitchen equipment and other items which support the trade in question. On purchase or refurbishment an accountant may have valued what are termed the loose chattels such as furniture and carpets but these may represent a small percentage of what may be claimed. The fact the accountant does not claim significantly more is a reflection of the complexity of the legislation. The good news however is there is no time limit for making a claim so you haven't missed the boat even if you bought the property some years ago and specialist firms exist who dedicate themselves to making claims.

A useful example

In 2005 a hotel is purchased for £500,000 excluding goodwill and loose chattels already claimed for by the accountant. In this instance it would not be uncommon to find that 25% of the purchase as capital allowances so £500,000 x 25% = £125,000. At the time of writing in April 2012 this could produce a tax rebate for 2010/11 of approximately £5,000 for a 20% tax payer or £10,000 for 40% taxpayers.

The tax bill for 2011/12 could also be reduced by £4,000 for a 20% tax payer and £8,000 for a 40% taxpayer. There would also be the benefit of paying less tax for years to come.

Why hasn't my accountant informed me about this?

This is the most common question asked and there is no one answer.

Accountants have many misconceptions on the subject which includes:-

i) making a capital allowances claim affects the amount of capital gains tax which may be payable on sale of the property. In reality they are governed by two separate pieces of tax legislation and yet it is a misconception which persists with no basis in fact.

ii) the purchase contract contains values for fixtures and fittings which are binding. Normally we would expect contracts of this nature to be binding but with capital allowances claims they are not as capital allowances claims are governed by statute and not by the purchase contract. For the purposes of the Capital Allowances Act 2001 claims must be made on the basis of a "reasonable apportionment" based on the facts associated with the purchase or refurbishment of the property.

iii) any tax advantages are clawed back on sale of the property. Again a misconception. As long as the seller is given the correct advice either by their current professional advisers or by contacting a specialist capital allowances claims company then this should not be the case..

What should I do if I want to investigate further?

If you contact a reputable capital allowances claims specialist they will give you an estimate of the likely result of undertaking a claim together with the basis of their fees. This allows you to make a judgement as to whether you want to make a claim or not. It is also worth asking the company whether the person who will undertake the work is both a qualified surveyor and tax qualified i.e. a member of the Association of Tax Technicians or the Chartered Institute of Taxation.

If your accountant has reservations the capital allowances claims company will speak to them to answer any questions they may have. There is no downside to making a claim and large companies who own commercial property commission this work as a matter of course.

John Plumridge BA(Hons) MCIPS Managing Partner Curtis Plumstone Associates 02392 696815 07779 756213

Source: EzineArticles
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