Capital Allowances for Fixtures – New Rules from April 2012
5th February 2012
The Second Hand Fixtures Riddle
Following the Treasury’s Consultation on the ‘tax leakage’ caused by uncertainty in the Fixtures legislation, details of the new proposals for capital allowances on fixtures have been published, ready for implementation post April 2012.
Government’s key concern was the perception that allowances were potentially being double claimed by tax payers on either side of second hand property transactions. Although the legislation is clear that the maximum a new owner can claim is the amount at which the previous owner has sold the assets, the historic lack of time limit on the period available to make claims meant that, in many cases, this prior claim information was simply not available.
The Treasury has therefore taken a two pronged approach to ensuring that allowances figures are essentially agreed, or at least considered at the point of the transaction. The initial measure being mandatory pooling of all fixtures before a change of ownership and the second being that the value of these fixtures must be formally fixed within two years of the transfer in order for a new owner to claim.
The devil however, as always, is in the detail.
Mandatory Pooling
In its initial Consultation proposals, the Treasury had suggested, that a time limit be imposed within which owners of fixtures must identify and pool the relief available to them – ‘Mandatory Pooling’. Following Consultation, however, Treasury has opted to impose conditions whereby a new owner of fixtures is required to pool their assets any time after acquisition as long as this is before the assets are then sold on or disposed of. The perception is that this removes the restrictive one or two year time limit originally considered at Consultation stage, but would still require the fixtures expenditure to be recorded in some way.
In respect of ‘new’ fixtures, Government considers that this allows taxpayers plenty of scope to identify and pool expenditure even for large, expensive projects which may span several years, but before the asset is sold on or disposed of.
Viewpoint
Although this may appear not to be a significant change to current rules, the requirement for mandatory pooling of fixtures expenditure should focus property owner’s minds in respect of the tax relief available to them. From April 2012, expenditure on fixtures must be recorded and pooled by owners of fixtures before they are sold on – although it should be remembered that this does not mean that the allowances need to be
'CLAIMED'.
Qualifying expenditure incurred prior to April 2012 can continue to be identified and claimed at any time before sale, with no requirement for mandatory pooling. Significant opportunities still exist therefore, for property owners who currently hold property and have not made relevant claims on those properties.
Fixing the Value
The new Section s187A states that a new owner of fixtures will only be able to claim where the prior owner eligible for allowances has:-
- Allocated his expenditure to a capital allowances pool before the prior owner ceased to own the asset (‘the pooling requirement’);
- Agreed a disposal value either through the intervention of the Tribunal to determine the part of the sale price attributable to the fixtures, or through the use of the s198 joint election within 2 years of the transaction; or
- Made a disposal value statement in writing stating the disposal value of the fixtures he is required to bring into account.
Essentially this means that, unless prior owners were not entitled to claim allowances, new owners must be very proactive at the point of considering a purchase to ensure that the prior owner has followed the rules above and pooled his expenditure (whether he wants to claim it or not), or use this fact in negotiating a reduced purchase price. Without this determination of fixtures value at sale, the new owner will not be able to claim.
Furthermore the mechanism for agreeing the value of the fixtures at sale will now either have to be a joint election within 2 years of the transaction or by recourse to the Tribunal within 2 years of the acquisition. It would appear that the ultimate limiter in all cases going forward will be the amount that has been pooled by the seller – and unless this has been documented in substantial detail, could prove to be even more problematic to both buyer and seller.
Viewpoint
It seems that in meddling with the Fixtures rules, the Treasury has managed to create a situation where property buyers HAVE to take a proactive approach to the fixtures contained in their building, as without due consideration, buyers may be in a position where the amount available for them to claim is NIL. This will require substantially more engagement in the tax element of property transactions by the client’s professional team (from agents to lawyers), as in reality unless sellers can be persuaded to carefully look at their disposal figures, the new owners may substantially lose out.
There could conceivably be a situation where a buyer may have to calculate the allowances that were due to the seller by way of a just apportionment of their purchase price (and then ensure the seller warrants not to make a claim), ask the seller to pool this value of fixtures, agree to a joint election at this value, so that the buyer can then make a sensible claim. Although, as specialists, we can see that the value of relief could in many cases justify this level of involvement, complexity and inevitably fee, taxpayers may find this hard to understand and a very bitter pill to swallow.
Opportunities to make claims where NO prior owner has been entitled to make a claim for allowances (such as properties that have always been in government or charity ownership, or held on trading account, for example) appear not to be caught by the full rules. In these cases, new owners should be free to make full just apportionments of their purchase price, but they may be wise to record a statement of the claim for retention by both parties to the transaction.
From April 2012, there will no longer be option of ignoring the capital allowances position at the point of acquisition. Sellers need to be proactive so as not to devalue their property, and buyers need to be proactive to ensure they do not lose the right to claim any allowances.
S198 Elections to fix Value
As we have discovered the use of the s198 joint election to fix the value of fixtures will be forced upon buyers who do not want to go to the expense and trouble of consulting the Tribunal to determine the value of fixtures at sale. The mechanism of the election was, however, going to be subject to some amendments as initially proposed at Consultation although these have not been taken forward, and the valuable £1 election remains an available tool for sellers. That said, the election is to be jointly agreed and buyers should exercise suitable caution before giving away their entitlement to relief – once again, therefore, knowledge by all parties in the capital allowances potential of properties at transfer MUST NOT be ignored!
Transitional Rules
The legislation as proposed is to be introduced for new expenditure post April 2012, however a transitional period up to April 2014 is proposed for bedding in the rules.