Gifted properties

Why Did Six Forward Get Involved?

Our initial review focussed on the property being gifted to see whether a route to entitlement existed following the transfer of property to our client. It was quickly established that the property was of a residential nature and with no commercial aspect, entitlement to claim was restricted by CAA2001, section 35 – Expenditure on plant or machinery for use in dwelling-house not qualifying expenditure in certain cases. As part of broader tax affairs, the accountant now had one less thing to worry about.

On meeting with the accountant and client to discuss future plans, the client informed us that a complete demolition and rebuild was intended. This would happen before commencement of the FHL business. As such, no claim would be available for our client until the new build was completed and the FHL business commenced.

With a 6 month build plan at a cost of c £750,000, we remained close to the client during the build phase, updating our report in line with monthly valuations, specifically noting variations to the original tender.

How Did We Help?

For projects of this type, we typically see capital allowances amounting to 20% to 45% of total expenditure depending on the construction method and materials, and the specification of the internal fit out. Despite the high specification fit out on this occasion, the materials adopted were of significant expense, comprising steel, timber and locally sourced stone. As such, the allowances as a proportion of total spend were slightly lower than anticipated but still a very good result.

Had the property been developed for another commercial use, the balance not qualifying for plant and machinery allowances (PMAs) would likely have attracted relief via structures and buildings allowances (SBA) at a rate of 3% per annum over 33 1/3 years. FHLs and property of a residential nature are specifically excluded from this relief.

Explanations were made on the correlation between Capital Allowances and Capital Gains Tax (CGT), overcoming the common misconception that claiming capital allowances now will lead to an increased CGT charge when sold at a profit later. Furthermore, it became clear that by making the claim early, despite the first-year loss position, annual investment allowances (AIAs) would accelerate the write down of the allowances to increase the loss position and enhance cashflow in later years in the absence of future tax liabilities until the tax losses were exhausted.

What Was The Outcome?

As a result of our involvement, we identified a significant level of PMAs to provide tax savings in excess of £77,000 at an average income tax rate of 32.5%.

Relevant Legislation For This Case

Capital Allowances Act 2001 s.11, 15, 16, 17, 33A, 176

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