Act now to pool expenditure Image

Act now to pool expenditure

Posted: 27/01/2014

All too often, capital allowances are left until the last minute. This is surprising given that they can form an important part of a property transaction. Considered early, there is an opportunity for capital allowances to add value. Legislative changes, some of which came into force in April 2012 and the remainder of which come into force in April 2014, are now highlighting the need to act early.

What are capital allowances?

When a property is purchased, a buyer acquires not only the land and buildings but also the fixed plant and machinery in those buildings. Usually expenditure on a property purchase will be capital expenditure and the Capital Allowances Act 2001 (the 2001 Act) entitles taxpayers to claim capital allowances in respect of certain, but not all, capital expenditure.

Capital allowances are a form of tax relief for property owners, occupiers and investors. They are available for expenditure on certain plant and machinery, energy- and water-saving technologies, buildings and structures (such items can represent a significant proportion of a property’s value/price). Qualifying expenditure can be subject to different rules/rates of allowances. Accordingly, expenditure of the same type is generally “pooled” together. Expenditure on fixed plant is either allocated to a “general pool” (to which an 18% written down allowance applies) or a “special rate pool” (to which an 8% written down allowance applies).

If claimed (they are not given automatically), capital allowances provide the claimant with an annual tax deduction that reduces the claimant’s taxable profits and the tax that the claimant pays. Accordingly, allowances act as an effective way of reducing the after-tax cost of acquiring property.

Section 198 election

It is possible for the seller and buyer to make a joint capital allowances election, known as a “section 198 election” (but note this is only possible if the seller has claimed capital allowances). Such elections fix a portion of the property price to fixtures in the property qualifying for plant and machinery capital allowances. Generally, the election will bind the buyer and seller as well as HMRC.

Rules prior to April 2012

Before April 2012, the sale contract could (but did not have to) deal with capital allowances; a value for the fixed plant could be agreed by the seller and buyer by way of a section 198 election (typically recorded in the sale contract).

Although the amount was open to negotiation, it was in the seller’s best interest to apportion a nominal amount of £1 to the fixtures in the main pool and £1 to the fixtures in the special rate pool.

Alternatively the sale contract could remain silent on capital allowances. In this case, the seller and the buyer would each agree the value for the fixed plant with their respective HMRC officer, such value representing a just and reasonable apportionment between the land and buildings on the one hand and the fixtures on the other.

The new rules

The capital allowances legislation relating to fixtures within buildings was amended by Schedule 10 to the Finance Act 2012. This introduced:

  • from April 2012, a “fixed-value requirement”; and
  • from April 2014, a “pooling requirement”.

The fixed-value requirement is that the part of the price apportioned to fixtures in the building must be fixed either by:

  • the seller and buyer agreeing and entering into a section 198 election at the time of the purchase (or within two years); or
  • making an application for a determination by the First-Tier Tax Tribunal within two years of the purchase.

The pooling requirement is that the seller must have “pooled” its expenditure on fixtures before a property is sold. It must either:

  • make a claim for capital allowances; or
  • notify HMRC of the amount of the qualifying expenditure and add it to the pool without actually making any claim.


These new rules mean that it is no longer an option to allow the sale contract to remain silent; buyers cannot leave the issue of capital allowances to be sorted out after their purchase. The fixed-value requirement and the pooling requirement must be satisfied before a buyer can claim plant and machinery capital allowances on fixtures in an existing commercial property. If capital allowances are not dealt with in the sale contract, the buyer may be unable to claim capital allowances or pass them on to a future buyer. Capital allowances must now be actively considered up front in a transaction.

Buyers (especially those with capital allowances advisers) are unlikely to accept the standard responses to pre-contract enquiries of “not applicable”, “none available”, etc. They will want full capital allowances information, including:

  • details of the seller’s capital allowances claims history on every item within the property;
  • details of the capital allowances history of other former owners;
  • details of any capital contributions made to tenants;
  • the seller’s tax returns.

From April 2014, a buyer will also require evidence that the “pooling requirement” has been met. This means that sellers need to pool their fixtures expenditure (even where they have not and do not wish to claim allowances themselves). Sellers should budget for the additional costs (getting capital allowances advice, etc) that are likely to be incurred in dealing with this requirement.

In order to avoid unnecessary cost and delays, prudent sellers will get their capital allowances information in order prior to sale. It is really too late to deal with capital allowances in replies to standard enquiries. The better approach would be to ascertain the capital allowances position well before this point. The seller should ensure that before signing heads of terms for the sale of their property, they have gathered all the relevant capital allowances information together and given it to their solicitor. They should leave enough time to do this and put their surveyor/capital allowances advisors and solicitor in touch with one another. A favourable capital allowances position could be reflected in the sales brochure and be a selling point, rather than a nuisance.

Other considerations

Section 198 election: if the seller and buyer opt to make a section 198 election, it is important that the election is irrevocable and in the correct form. If it does not contain all the statutory information, or if it is otherwise deficient, it may not take effect as a valid election. The parties’ solicitors should be able to provide a valid form of section 198 election.

The sale contract: the parties must address the capital allowances position in the sale contract. Failure to do so may mean that the buyer cannot claim capital allowances. Even if the buyer is tax exempt and cannot claim capital allowances, they still need to consider the capital allowances position. If they do not, it may prevent a future buyer from claiming capital allowances and could affect their chances of selling on the property and the price they obtain for it.

Key points for the surveyor

Pre-sale checklist: review your current portfolio:

  • What value did you claim on the purchase, if at all?
  • When did you claim and on what items?
  • Have you replaced any items during your ownership and when?
  • Did you claim on the above?
  • Did you claim revenue or capital expenditure?
  • Have you extended or refurbished the property?
  • Are you claiming any capital contributions?
  • Which pools have you claimed, and can they be split on sale?

On market:

  • What value of allowances is available to the purchaser? Consider whether there are any of the following: an overage claim, full claim, capital contribution, tax written down value, unclaimed assets, tenants’ works?
  • Can you send the purchaser details of all claims made?
  • As a taxpayer have all the qualifying items been “pooled”?
  • On unclaimed items, can we justify why they have not been claimed?
  • Do we have sufficient information for an election?

Typical documents to support a purchase claim:

  • Purchase contract
  • 2001 Act section 198 election
  • Evidence of section 185 of the 2001 Act compliance of previous vendor
  • Detail of previous claims

Typical documents to support refurbishment claim:

  • Ledger/capital account
  • Contract’s contract sum
  • Project variations
  • Final account
  • Drawings and specifications
  • Capital contributions

Key points for the solicitor

Practical points about the section 198 election:

  • An election is irrevocable. If it does not contain all the statutory information, or if 
it is otherwise deficient, it may not take effect as an election. Make sure that the solicitor has all the relevant information 
to hand.
  • The election must be notified to HMRC within two years of completion. It would 
be prudent to write a shorter timeframe into the contract and, ideally, to provide that the election is completed and signed on completion.
  • The seller and buyer must each submit a copy of the election along with their first tax returns in respect of the period for which the election has effect.
  • Make sure that the contract reflects 
the correct position. A seller that has 
not claimed (and does not claim) allowances, eg a tax-exempt pension 
fund, cannot make an election. However, they may still have to provide information to the buyer.
  • A buyer that cannot claim, or is not intending to claim capital allowances 
may still make an election (if the seller is able to). The buyer should bear in mind that they may wish to sell the property in the future.
  • A buyer acquires an office building for £20m from a seller with a £2 election. Following entitlement checks, over £2m of allowances can be claimed as set out below.
  • The seller provided the buyer with the following information on the capital allowances history (and appropriate contract wording was included in the sale contract):
    1. the seller acquired its building in 2006. A section 198 election for £2 was made on this acquisition;
    2. the seller refurbished the seventh floor in 2007 for £500,000. The seller made claims on the 2007 refurbishment works, making an election of £2 on those works. A capital contribution was made to the tenant in favour of the seller for £1,000,000 in 2007. No claim was made on the capital contribution;
    3. the seller refurbished the eighth floor in 2010 for £750,000. No capital allowances claim was made.

The buyer’s entitlement to claim equates to approximately £2m of allowances, based on the following:

    1. the calculation of a section 562 of 
the 2001 Act apportionment of the sale price on items that are now integral features (ie part electrical system including lighting and cold water), minus those in the refurbishments;
    2. the calculation of an apportionment 
of the integral features on the 2007 refurbishment;
    3. the calculation and pooling of the qualifying fixture items on the 2010 refurbishment;
    4. the calculation of the capital allowances based on the cost of 2007 capital contribution.

The seller will have to calculate the claim on the 2010 refurbishment and pool these into the accounts and provide a section 198 election to transfer the 
amount to the buyer.

This article was published in Estates Gazette in January 2014.

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