Capital Allowances Risks for UK Property Sellers

If you have clients planning to sell a commercial property – for example, a hotel or a care home – they need to think carefully about capital allowances before signing on the dotted line. In this post, we take a look at the capital allowances risks for property vendors.

The nature and size of the risks clients face will depend on what has gone on in the past. In particular, the risks depend on whether full allowances have already been claimed for the “fixtures” in the property. By “fixtures” we mean items such as baths, showers, lifts, wiring, heating, air conditioning, plumbing costs, etc. We are not talking here about moveable items such as tables and chairs.

Could clients be hit with a balancing charge?

If you have already advised the would-be vendor on claiming allowances for property fixtures, your client will have paid less tax as a result. The danger when the client comes to sell is that the tax relief gets partly or fully reversed. This can happen by way of a (possibly substantial) balancing charge, and your client could end up with an unexpected tax bill.

The good news here is that you and your client have a large degree of control. If you can help your client to take appropriate steps before signing the sale contract, any such clawback of the tax relief can be mitigated, and usually avoided altogether.

So how to avoid the balancing charge?

There are two key steps that will ensure the tax hit is avoided:

  1. Your client must negotiate with the buyer to agree an appropriate transfer value for the fixtures in the property; and
  2. You will need to ensure that there is a valid “fixtures election” in place to formalise that transfer value.

What is an appropriate transfer value for fixtures?

That is the million dollar question (maybe literally)!

Within certain broad parameters, there is no fixed rule about the amount of the transfer value, which is therefore to be negotiated between the parties. The figure does not have to be “reasonable” – so the party that is better advised can do well out of it. As long as everyone completes the paperwork properly, it will be binding on HMRC.

From your point of view advising the seller of the property, you want the transfer figure to be as low as possible. (The position may be different if there are unused tax losses. In this case, you may not mind what figure is used – but you will still need to implement a clear strategy). The buyer will be keen to sign an election with your client (which is helpful) but may be after a higher figure than you and your client will wish to concede.

What if capital allowances have NOT been claimed for the client’s property?

If allowances have not been claimed, the taxman cannot grab them back when your client comes to sell. So far so good!

But in reality, of course, that is to miss the point entirely. These allowances are very valuable and the real risk is that they don’t get claimed at all. The tax savings will then be permanently lost – not just for your client but for any future owner as well. For this reason, the buyer will almost certainly insist that the vendor captures the value of the fixtures in his/her/its own tax computations.

The buyer will then want your client to pass that value on to him, so that he can enjoy the tax savings. You are, of course, free to advise your client to do that, but you should also consider your client’s own point of view. If he could have claimed allowances, but has not done so, do you want to make a last minute claim and then hold back at least some of the tax savings?

In these circumstances, you will need to give clear and appropriate advice urgently (before signing the legal agreement). And if you are to do that, it is essential that you really understand what is going on, and what the opportunities are.

How can I find out more?

If you would like to do further reading, you may enjoy our article At your Disposal. Or you may like to watch my five-minute introductory video on buying and selling property,

Or contact us for a free discussion to explore the issues as they apply to your clients more generally.