Property update: capital allowances s198 – use it or lose it

Published: Friday 27 September 2019

Since April 2014, action has been needed to be taken when acquiring a commercial property, otherwise valuable tax relief could be lost.

Capital allowances are a form of tax relief, given when acquiring qualifying plant and machinery. When acquiring a commercial property, certain qualifying plant and machinery are hidden within the building but, nevertheless, still qualify for relief. These are referred to as ‘fixtures and might include electrical and lighting systems, cold water systems, ventilation systems and lifts.

Before 2014, it was a little arbitrary in terms of who had claimed allowances over the life of the building and what the new owner was entitled to claim, so new rules were introduced, to ensure consistent treatment.

When acquiring a commercial property, there are two requirements:

  1. Fixed value requirement; and
  2. Pooling requirement.

The fixed value requirement is met if a schedule is produced detailing the fixtures that are being transferred and the value attributable to them. This is often documented in a s198 election, which can be signed by the seller and buyer within two years of the acquisition. It is always advisable to get the election signed as part of the transaction, rather than trying to agree it afterwards.

In the absence of a s198 election, the buyer can apply to the tax tribunal, again within two years, for them to determine the value that should be brought into account. As a seller, clearly, you would not want to be at the mercy of an independent determination.

The pooling requirement is met if the seller has brought into their capital allowances pool the items that are being transferred with the building (providing they were legitimately able to claim allowances on them). So, if the seller has not claimed allowances, but was able to do so, they will need to reflect them in their tax computations and show the disposal value, before the buyer can claim any relief.

Failure to meet these two requirements will mean the ability to claim allowances on those transferred fixtures swill be lost forever.

Obtaining full details of capital allowances on form CPSE.1 is now essential to plan effectively for tax relief in the future. Answers of ‘not applicable’ should no longer be considered acceptable.

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Nick Haines
Nick Haines
Partner
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Johanne Tisdale
Johanne Tisdale
Associate Director
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