In practice, it was often difficult for taxpayers and HMRC to determine the extent to which a previous owner had claimed capital allowance relief on qualifying items in buildings. This was especially the case where expenditure was incurred many years before the capital allowances claim in question was made.
New rules, entitled 'mandatory pooling', will address this difficulty. A transitional period has run from April 2012 and the new rules will apply in full from April 2014.
'Mandatory pooling'
The new rules broadly mean that:
- the vendor and purchaser must agree the value of fixtures and fittings and other qualifying items to be transferred as part of a sale
- qualifying items can be transferred at any value between their cost and £1
- the purchaser is able to enjoy tax relief up to the agreed value of the items transferred
- the vendor and purchaser must make a joint election confirming the agreed value and send it to HMRC within two years of the property sale
- if the vendor and purchaser cannot reach an agreement the value that qualifying items are transferred at can be determined by a first tier tax tribunal.
Crucially, at the time of writing this article, there is no requirement for vendors to take any action ahead of a property sale. This position will change from April 2014. From this date, any items forming part of a property that qualify for capital allowances must have been 'pooled' (identified and disclosed in a tax return) prior to sale, otherwise they cannot be transferred to the purchaser. Non-pooling of qualifying expenditure from April 2014 would mean no future purchaser of the property would be able to claim capital allowances on that expenditure.
Implications of the new rules
As a result of these new rules, capital allowances will become a more important consideration for businesses looking to purchase property. The vendor's compliance with these new rules is also likely to form a more important part of commercial negotiations.
Failure by vendors to comply with these new rules may cause sales values to be reduced, as purchasers will be unable to claim the level of tax reliefs on the property that they might have expected. There could also be significant delays to the completion of future sales while the necessary work identifying and pooling qualifying expenditure is carried out.
The wide application of the new rules means that property owners who would not normally consider capital allowances should be mindful. When buying a property, organisations such as charities or property trading companies should ensure, that the business that they are purchasing the property from has met the requirements. Otherwise, when they come to sell the property, they may not meet the new requirements with capital allowances lost and prices reduced.
We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2014. NTD174 code exp: 30/6/2014