Capital Allowances – commercial property held in pension funds

The common consensus is… pension funds don’t pay tax so why would I want to reduce their tax bill. Well with capital allowances planning you can increase/preserve the future value of your property even if it doesn’t save you any tax. This blog will explain how.

The changes in the capital allowances rules over the last couple of years has meant good planning is needed to preserve the capital allowances position of your pension fund. By preserving as much in terms of possible capital allowances that can be transferred to the next owner you can use the next owner’s potential tax saving as a bargaining chip in price negotiations.

We have written previously about the changes to the capital allowances rules. Briefly these are:

  1. for commercial property transactions from 1 April 2012 (6 April for income tax) there is a requirement to fix a capital allowances value; normally by way of an election. This can be anywhere between £1 and the vendors original qualifying expenditure, split between the two capital allowances pools

  2. for commercial property transactions from 1 April 2014 (6 April for income tax) there is a requirement that the historic capital allowances are ‘pooled’ by the vendor before sale.

The above rules are now common when taxpaying entities sell to other tax paying entities. However this is something that is often missed with non taxpaying entities as people wrongly assume that because their pension doesn’t pay tax they don’t care about the capital allowances. By way of an example; if you have protected £100,000 of allowances by taking the appropriate actions, this could be worth £20,000 to the purchaser at current corporation tax rates (potentially even more if selling to an income tax payer).

Depending on what date the non taxpaying entity purchased the property they need to carefully make sure various rules are adhered to should they want to pass any capital allowances on to the next owner. Any non taxpaying entities acquiring commercial property since 1 April 2014 (6 April for income tax) need to make sure that they adhere to the fixed value requirement and the pooling requirement as per 1. and 2. By doing this they might have the opportunity to increase their sale price down the line.

If you have any queries, or a specific example, please contact me.

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