Capital Allowances &
Capital Gains Tax.
Often, we come across a business property owner who has not claimed capital allowances on fixtures that were already in their property upon acquisition, because it was believed that the benefit would be clawed back or affect the base cost when the property is sold due to capital gains tax (CGT).
A common misunderstanding about Capital Allowances.
Many property owners delay or avoid claiming capital allowances because of the belief that any allowances claimed on fixtures will be clawed back through Capital Gains Tax (CGT) when the property is sold. In reality, for CGT purposes a property is treated as a single asset — an interest in land that includes the building and its fixtures. Fixtures cannot be sold separately from the property, and capital allowances claimed on them do not increase the chargeable gain when a property is sold at a profit.
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What happens when a property is sold at a profit.
When a property is sold at a profit, there is no adjustment to the CGT base cost to reflect capital allowances previously claimed. This allows the seller to retain the benefit of those allowances without increasing the capital gain, particularly where a Section 198 election is used to fix a low disposal value for plant and machinery. The gain is calculated simply by comparing the purchase price and sale price of the property as a whole, rather than splitting the value between land, buildings, and fixtures.
Selling at a loss and tax planning considerations.
The position differs where a property is sold at a loss. In this situation, any retained capital allowances reduce the allowable capital loss, although a loss can never be turned into a gain. As capital losses can only be offset against capital gains — while capital allowances reduce taxable income over time — careful planning is required. Factors such as timing, tax rates, and the owner’s wider tax position should be considered to determine the most tax-efficient outcome.
Questions.
Have any questions that we haven’t answered here? Get in touch with us and we will do our best to answer them for you!
Why Accountants Can’t Claim These Allowances.
Capital allowances on property cannot be identified from accounts alone and usually require a specialist review of the building itself. As accountants are not trained or insured to carry out building surveys, significant capital allowances are routinely missed without this process.
What Are Capital Allowances?
Capital allowances allow businesses to deduct qualifying capital expenditure on plant and machinery from taxable profits. When a commercial property is purchased, part of the purchase price may relate to qualifying assets already within the building, which are often overlooked but can deliver significant tax relief when properly identified.
Who Can Claim Capital Allowances?
Businesses and property owners who incur qualifying capital expenditure, including those who purchase commercial property, may be entitled to claim.
What Can Qualify?
Capital allowances generally apply to qualifying plant and machinery and certain fixtures within a commercial property. These items are often embedded within the building and, when correctly identified through specialist analysis, can be pooled and claimed for tax relief.