Commercial property owners are known to be missing out on significant levels of tax relief because of one common mistake – a failure to review the capital allowances position in respect of their asset.
Commercial property may be used in their trade or as an investment, owned personally, in partnership, or in a company; but in which ever guise, commercial property can provide an invaluable source of tax relief.
That was the message from Gary Devonshire, East Midlands-based senior tax manager for international accountancy firm Mazars.
“There are real benefits to be had by acting now,” he stressed.
UK commercial property owners are entitled to claim tax relief on items fixed within the commercial property (“fixtures”) that qualify for capital allowances. Examples of which are lighting, heating, air-conditioning systems, water systems and toilet and kitchen facilities to name but a few.
Rates of capital allowances on “qualifying assets” range from 8-100 per cent, depending on the nature of the assets and the date they have been acquired. The available tax relief is therefore spread over time in many cases.
So, for example, if a property is purchased for £4 million and £1 million of the cost is attributed to qualifying fixed assets; tax benefits of up to £450,000 could ultimately be obtained if an individual or partnership (including an LLP) owns the property and £200,000 if it is held within a company.
This aspect of tax planning has however become more complicated in the event of a commercial property transaction due to recent Government changes to the capital allowances legislation.
Mr Devonshire said: “As a result of this change in legislation, it has become vitally important to probe the capital allowances history of a property prior to any transaction completing. This may help buyers to maximise the valuable capital allowances they can claim and on the other side of the coin, assist sellers by maximising their sale value.
“The vendor may or may not have made a claim in respect of these assets and the position needs to be clarified. Failures on their part to either reveal any historic claims made or make a claim themselves, can remove the ability for the purchaser to claim this valuable tax relief. This not only affects the tax position of the purchaser but it can also affect the future re-sale value of the property. These are significant issues.
“The effect of this change in legislation is that capital allowances need to be placed at the forefront of any significant commercial property transaction. If you are either thinking of selling, or buying a commercial property of significant value in the near future, then please ensure the capital allowance position is reviewed and advice taken at the earliest stage. Failure to do so can have a detrimental effect.
“Capital allowance claims can still however be made in respect of commercial property that has been owned for significant time periods, providing it can be demonstrated that there has not been a claim made previously by the current or previous owners. This involves a review of all the legal documentation available in respect of historic commercial property acquisitions.
“This exercise is not time barred at the moment and you can go back as far as you wish, but as with any piece of tax planning, HMRC can change the landscape quickly.”
Turning to property refurbishment, Mr Devonshire added: “Many commercial property owners and in some cases tenants; do not review their refurbishment costs carefully. Refurbishments can contain significant levels of assets qualifying for capital allowances and this can benefit the future post tax profit streams significantly.”
And on finance, he noted: “With bank funding still restricted in many cases, capital allowances can provide the lender with additional comfort in terms of the ability of the borrower to service the debt. Capital allowances reduce the profit levels of the business or investor and as such if this information is presented to the bank correctly, they may be willing to soften their lending criteria in marginal cases.”
In broad terms, if you either own or are about to purchase or indeed sell, commercial property of a substantial value, please seek advice. Failure to do so can have a significant tax and commercial effect.