Ensure that the available tax relief is maximised
There have been significant changes to the tax legislation in recent years relating to capital allowances that can be claimed on expenditure on buildings. The effects of these changes need to be considered when farmers and landowners are constructing a new building, refurbishing an existing building, or acquiring a second-hand building as part of a land transaction, so that the capital allowances tax deduction is maximised.
The changes mean that when a purchase of land and buildings is finalised, failure to establish the capital allowances position at that point can result in a possible tax deduction being ‘lost’.
The Structures and Buildings Allowance (SBA)
Prior to April 2011, Agricultural Buildings Allowances were available on the cost of an agricultural building, resulting in a tax deduction for the cost of the building against income earned from the use of the building. As a result, a tax deduction could be obtained for expenditure on a building which may qualify as plant and machinery, even if this part of the expenditure was not separately identified.
This allowance has effectively been reinstated with the introduction of the SBA for eligible expenditure where the contract has been entered into on or after 29 October 2018. Eligible expenditure is capital expenditure on non-residential construction projects, including new build, refurbishment and fits-outs. A 2% straight line tax deduction is claimable over 50 years.
The allowance will allow a 100% tax deduction for the cost of new agricultural buildings either as SBA or plant and machinery capital allowances. Eligible SBA expenditure will not be eligible for the Annual Investment Allowance. Hence it will always provide earlier tax relief if expenditure eligible as plant and machinery can be identified.
The sale of an asset on which SBA has been claimed will not result in a capital allowances balancing adjustment on sale. The purchaser takes over the remainder of the allowances over the remaining part of the 50 year period.
However, the capital gains base cost will be lowered by the amount of the SBA claimed.
‘Integral features’ of a building
A separate class of assets for capital allowances purposes of ‘integral features’ was introduced in 2008. A reduced rate of annual allowance is available on such expenditure compared to ‘normal’ plant and machinery. Integral features will include electrical systems (including lighting systems), cold water systems, hot water and central heating systems, powered systems of ventilation, air cooling or air purification, and any floor or ceiling comprised in such systems.
Prior to 2008 some of this expenditure, for example cold water systems, did not qualify for capital allowances unless the system was necessary for other qualifying plant to work.
A 6% annual writing down allowance is currently available on integral features within a building. Qualifying plant and machinery within a building which is not classified as an integral feature will currently qualify for an 18% writing down allowance.
Qualifying expenditure on both plant and machinery and integral features will qualify for the Annual Investment Allowance, which currently provides 100% tax relief on the first £1,000,000 of qualifying capital expenditure in a year, incurred on or after 1 January 2019.
Buildings being constructed or refurbished
In order to maximise the capital allowances claimed on a new building, or capital allowances on the refurbishment of an existing building, it is essential that a full list of the work being undertaken is produced by either the builder when quoting for the work or the architect involved in the project when producing his schedule of works; as this will provide the basis of maximising the tax relief obtained on such expenditure.
Such analysis will make it possible to identify what expenditure is eligible for capital allowances and whether this expenditure is classed as an integral feature or plant and machinery. This will accelerate the tax relief compared to claiming the SBA.
Acquisition of second-hand buildings
A second-hand building could be acquired as part of the acquisition of a farm, or land on which the building is situated. Some agricultural buildings, for example a tractor shed, are unlikely to have the potential for a capital allowances claim on fixtures. Whereas a milking parlour is likely to have the potential for a significant capital allowances claim.
Joint election required
A purchaser can only claim capital allowances on fixtures within the property if they and the seller have signed a joint election to agree a value for such fixtures on which the seller has previously made a claim, or if the value has been agreed by a tax Tribunal. Where expenditure on a building was incurred before 2008 on integral features, which did not qualify for capital allowances until after 2008, capital allowances could not have been claimed on this expenditure by the vendor. Therefore, this expenditure will not be covered by any joint election and capital allowances can be claimed by the purchaser on these items.
A purchaser will be unable to claim capital allowances on any fixtures on which the seller could have made a claim for capital allowances, unless the seller has actually made a claim.
Impact on transactions
These conditions relating to equipment in buildings can have an effect on property transactions as they require a significant amount of information to be extracted from the seller if the purchaser is to make any claim for capital allowances.
The ability to claim capital allowances on buildings acquired within a farm purchase can provide the purchaser with a tax deduction of tens of thousands of pounds. Failure to complete the necessary formalities when the property is acquired, or failure by a previous purchaser to complete the formalities, can result in a significant tax deduction for capital allowances being ‘lost’, and affect the price paid.
What is included in fixtures?
The term fixture means plant or machinery that is so installed or otherwise fixed to a building as to become, in law, part of the building. For example electrical and water systems, but not a milking machine or other plant, which is normally only fixed to a building to enable it to be used efficiently. Anything that can be removed from a building without damaging the fabric of the building would not be regarded as a fixture.
Going forward
The above hopefully illustrates how the recent changes in the capital allowances legislation can have a significant effect on the capital allowances and tax deduction available, where a building has been purchased, constructed or refurbished.
To allow the purchaser to maximise future capital allowances claims on a second hand building they have acquired, they will need to establish what claims the vendor has previously made on the building. This will need to be sorted out when the transaction is being finalised. Failure to do so can result in a significant tax deduction being ‘lost’.
Hazlewoods have extensive experience of undertaking capital allowance reviews following the construction or acquisition of buildings, and providing advice when buildings are being acquired.
Please contact Peter Griffiths, Nick Dee or your normal Hazlewoods contact on 01242 680000 if you would like advice regarding the capital allowances available on the acquisition or construction of buildings, or would like a capital allowances review undertaken.