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Real Estate Tip of the Week: Capital allowances 101

Published 18 January 2021

Capital allowances available on the sale of a property can have huge value to both the buyer and seller. It is therefore important that they are not overlooked.

Tax relief for investment expenditure is granted in varying ways. Capital allowances cover items such as the cost of lifts, air conditioning systems, electrics and much more. Expenditure either qualifies for immediate tax relief through your “annual allowance” or goes into a “pool”, a proportion of which can be written off against taxable profits each year.

When purchasing an investment property, the seller may have unexhausted pools of allowances in respect of plant and machinery which will transfer on a sale. To establish whether it does, it is important that full CPSE replies to the capital allowances queries are given. Sellers may have a wealth of untapped capital allowances available, and (generally) if they don’t fix their value on sale to a buyer they are lost (an exception being those parties that can’t claim capital allowances – pension funds or local authorities for example, in which case a buyer may still be able to claim).

When a property is sold the capital allowances attaching to the assets inevitably transferring passes and the parties can choose whether the seller or buyer gets the tax relief. A £1 capital allowances value in the sale contract means the seller retains the relief (or perhaps has already used it up).

Our top tips would be:

1) When acquiring an investment property, check to see if you can acquire any allowances;
2) When you spend money on your investment properties, ensure expenditure is “pooled” where it can be;
3) When selling an investment property, be aware of the value of capital allowances to the buyer and price accordingly;
4) You can pass capital allowances to a tenant (provided they pay a premium for their lease). In some scenarios this can be a good incentive;
5) Where you make a capital contribution to your tenants on the grant of a lease for their fit out, generally you want to ensure you retain capital allowances (requiring the tenant to inform you what the cash is spent on). This is a win-win for both parties - you get tax relief for your contribution and the tenant does not pay corporation tax on the incentive to the extent it qualifies for capital allowances for the landlord. A Lease or Agreement for Lease can draft for this.