Act now to ensure Tax Relief on Property Purchases is not lost

1 April 2012 represents an important date for business owners, with significant changes in respect of capital allowances (tax relief for capital expenditure).

Currently claims for capital allowances on fixtures within buildings can be made retrospectively for purchases of second hand commercial property purchased at any point if still owned by the claimant. Although the allowances can only be claimed for the previous two years it does not matter how long ago the property was acquired.

On 6 December the Government issued draft 2012 Finance Bill clauses which, if enacted, will alter the timing of such claims from April 2012. The buyer and seller of a commercial property need to agree the amount attributable to fixtures and notify HMRC within two years of the purchase by way of an election. If they cannot agree a value, this will go to a tribunal.
 
These elections will become mandatory from 1 April 2012 for corporation tax purposes and from 6 April 2012 for income tax purposes where the seller has claimed capital allowances. If an election is not filed with HM Revenue & Customs within two years of the property deal the purchaser will not be able to claim capital allowances on the property he has purchased. The onus therefore is on the purchaser to drive the agreement process prior to completion whilst the seller is interested and avoid the expense of going to a tribunal.
 
Commercial property dealers will therefore be best advised to consult capital allowance specialists promptly, rather than several years after the deal as often happens now.
 
However, it remains possible to review historic expenditure on property deals before April 2012. It may be that you bought or developed a property several years ago and a detailed review of expenditure was not carried out at the time. If you think you might fall into this category please let us know.
 
The amount of tax relief available will depend on the type of property and could be as high as 25% of the purchase or development price, resulting in significant tax savings. Indeed, we have recently completed a thorough review of the qualifying additions of an inn, in conjunction with a capital allowance valuation specialist, and over 26% of costs were identified as qualifying for tax relief.  

Additionally, April 2012 also marks the date when what is known as the Annual Investment Allowance is reduced. At present, purchases of qualifying plant and other equipment can be written off against taxable profits. Tax relief is obtained by utilising the Annual Investment Allowance and for the current tax year this amounts to a 100% write off, or full allowance, with a limit on expenditure of £100,000.

As with most opportunities all good things come to an end, and from April 2012 the annual limit is being reduced to £25,000. Therefore if a business plans over the next year or so to incur substantial investment in replacing worn out, or buying new qualifying equipment, timing is absolutely critical.

It should be noted that for limited companies, the Annual Investment Allowance has effectively already decreased from £100,000 as any accounting period that straddles 31 March 2012 will receive an Annual Investment Allowance calculated at a pro rata amount. The same applies for unincorporated businesses with accounting periods that straddle 5 April 2012. Therefore it is essential that advice is sought on the timing of capital expenditure. In many cases it could be advantageous to bring forward expenditure for tax purposes, where commercially possible.

Annual Investment Allowances and the timing of capital expenditure should always be on the agenda when considering tax planning opportunities.

When planning forward business owners should consider the impact these changes in the capital allowance legislation might have on their business, and planning opportunities which they might have access to at the moment, but which could be substantially reduced, or lost, if they do not seek appropriate advice now.

David Robinson
Tax Consultant
If you think your business may be affected by these changes or you require more information call David Robinson on 01228 690200 or email david.robinson@armstrongwatson.co.uk
 

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