Capital allowances on property purchases: no second chances

In recent years, developments in the capital allowances world have stemmed largely from statute.  This is a major change from how it used to be. Traditionally, statute remained largely untouched year after year, whilst a raft of cases significantly changed capital allowances practice within the broad statutory framework.

Increasingly in modern times, Government has legislated directly, sometimes to the point of ‘tinkering’.  How else to explain the arbitrary fluctuations in the Annual Investment Allowance?  In only seven years since its creation, this has wavered between £25,000 and £500,000 (the latter amount set by the very people who a few months earlier said that a £25,000 allowance distorted business decisions).

The Capital Allowances Act 2001 was the first legislation to appear under the Tax Law Rewrite initiative, aimed at simplification and plain language.  At the time, it consisted of 581 sections; now it has 812, a 40% increase.  Some valuable legislation has been included in those extra sections, not least the rules for ‘integral features’ or those for ‘long funding leases’.  But it is not simplification.

The same can be said of the latest major change, first legislated for in 2012 but only now having a full impact.  This is the system of rules bolted on to existing legislation dealing with plant and machinery fixtures in second-hand buildings.  Some of the new rules have been in force for over three years, but the awareness of many professional advisers (and most taxpayers) is woefully inadequate.  In the case of advisers, ignorance must significantly raise the possibility of complaints, fee disputes, negligence suits and the consequent claims against PI insurance.

The new rules introduced a major change in the law and practice for claiming capital allowances on property purchases.  The effect of the rules, if ignored or improperly dealt with, is disastrous.  Put simply, if property purchasers and their advisers get it wrong at the time of the deal, it cannot generally be put right afterwards.  In tax terms, what this means is that the seller may suffer a claw-back of all the allowances he has claimed since he owned the property, whilst the purchaser (and all subsequent purchasers) will be permanently debarred from making a claim.  Perversely, this means that even an item which has always been considered as plant, such as a lift, and on which allowances have been claimed for many years, may have the entire tax relief clawed back from an owner on sale and, over the rest of its life, never attract a single penny of capital allowances.  So it will not benefit from any tax relief over the life of those fixtures, which may well be decades. Most taxpayers and advisers are blissfully unaware of these threats.

Bloomsbury Professional’s Capital Allowances: Transactions & Planning by Martin Wilson and Steven Bone, soon to be published in its 18th edition, covers these and every other aspect of capital allowances in an erudite yet practical way, enabling those affected to safely and confidently negotiate their way through the minefield of capital allowances legislation, which is these days anything but ‘simplified’.

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Written by Ellie MacKenzie

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