25 September 2007

Commercial Property Capital Allowances - consider the changes...

Capital Allowances can be available in respect of a commercial property, depending on the use of the property and what is included in the property. Allowances available may include Industrial Buildings Allowances, if the building is in a qualifying use, or plant and machinery allowances in respect of items included in office buildings, for example air conditioning.

The various allowances available can be set against the taxable profits of a business occupying a building that it owns, or alternatively the allowances available can reduce the rental income charged to tax of a landlord or property investor. Therefore, the available allowances should be considered when acquiring a commercial property, as they will affect the net cost of the property, and the pay back period for an investor when considering their return on capital.

The 2007 Budget made several changes to the Capital Allowances legislation which will affect the allowances available in the future on commercial property. Some of the changes were effective from 21 March 2007, while others will take effect from April 2008. However, all of the changes will need to be considered when acquiring and selling commercial property, or when landlords enter into new leases, as they will affect payback periods.

For example, based on the proposed legislation, Industrial Buildings Allowances will no longer be available in the future. Not only will this affect the net cost of future acquisitions of previously eligible properties, but leases may have been entered into in respect of previously acquired properties, on the basis that Industrial Buildings Allowances would be available in future. As this is unlikely to be the case, this will need to be considered before entering into a new lease in the future.

The rate of allowances available on the fixtures included in commercial properties is to be reduced from 25% per annum to 20% from April 2008, and for certain fixtures could be reduced to 10%. Additionally, first year allowances of up to 50% could currently be available in respect of fixtures on the acquisition of a commercial property. First year allowances will be replaced from April 2008 by an annual investment allowance, which will be a maximum of 100% for the first £50,000 of expenditure. Therefore, the allowances available in respect of the fixtures included on the acquisition of a commercial property, may be significantly deferred following the changes, if the fixtures included are a large proportion of the cost of the building. This may influence purchasers to bring forward acquisitions before April 2008, as the deferment of the allowances may affect payback periods.

It is clear that the changes introduced in the 2007 Budget to the Capital Allowances legislation will affect current and future owners of commercial property, and need to be considered at the earliest opportunity to assess the affect of the changes. Property purchasers should involve their Tax Advisers at the earliest possible stage in a property acquisition, to assess the likely Capital Allowances available, as this may affect the timing or net cost of the purchase decision.

Peter Griffiths can be contacted on 01242 680000 or email pg@hazlewoods.co.uk