In recognition of the need to incentivise businesses to invest in the creation of new assets in the current economic uncertainty, the government has introduced a new capital allowance called structures and buildings allowance (SBAs). The essence of which is to enable the tax-payer to now claim tax relief on the vast majority, if not all, of their property and building related expenditure, with some notable exclusions around “residential” uses.
The tax relief is applicable for expenditure which has been contracted after 29 October 2018, this means for any building works contracted before this date, are specifically excluded. As with the current capital allowances system, to take the benefit, the asset must be held for investment purposes, typically as a trade, UK or overseas property business and not held as stock for trade. The relevant interest must be held which is the interest under which the construction expenditure is incurred, which will typically be the freehold or leasehold interest.
Note here, that this relief does not only apply to landlords, but is also claimable by tenants of properties who undertake building works themselves.
The relief applies to all sectors except for certain residential uses, namely:
- A dwelling house i.e. facilities for day to day domestic living
- Residential accommodation for schools
- Student accommodation
- Residential accommodation for armed forces
- A home or institution providing accommodation – apart hotels, children or adult home, excluding care homes with “personal care”
- A prison or similar
In summary, hotels are allowed as are care homes, but student accommodation, apart hotels and other residential accommodation types are generally excluded.
In arriving at the qualifying expenditure for SBAs, the recently published guidance from HMRC, specifically excludes expenditure which qualifies for another allowance, namely plant and machinery allowances. This is a key point, as unlike its similar predecessor, industrial building allowances, the tax-payer cannot take the total build cost and apply the relief, it must instead make an assessment of the eligible plant and machinery allowances first and then apply SBAs to the balance. However, note that further exclusions must be made for works to land, such as landscaping and for land remediation, early fees for planning and finance.
Works to land however should not be confused with site preparation, which would be allowable where the works are relating to structures or buildings, and includes cutting, tunneling or levelling to land.
SBAs are claimed at 2% per annum over a 50 year period on a straight line basis with no rolling forwards of any unused allowances. Therefore, the value of claiming SBAs will vary depending on the type development, level of qualifying expenditure and expected holding period. The SBA claim can only be made once the building or structure is brought into qualifying use. So for a owner occupier it will be once the business starts its trading activity or for an investor, it will be upon the date of the first commercial lease begins and proof that the ordinary business is entitled to rents or other receipts.
Therefore, unlike normal capital allowances where an interim claim can be made when the project is incomplete at the tax year end, for SBAs the claim is only made in the tax year end where the building or structure is first brought into use and for the first year, the writing down allowances must be time apportioned.
It should also be noted that there is a sting in the tail for those tax-payers who do claim, as in the event of a disposal to the extent SBAs have been claimed, the amount is added to the disposal proceeds. With the tax relief gained over the ownership clawed back by paying a higher capital gains tax. Note this is not the case with normal plant and machinery allowances, where there is no increase to CGT by claiming.
It is important that the expenditure which is eligible for plant and machinery allowances is now maximised from a CGT avoidance point, but also this expenditure is claimable at the higher rates of 6% and 18%, which unlike for the SBAs can also be claimed against the annual investment allowance.
When it comes to selling and buying, HMRC require that an allowance statement is provided, for the purchaser to continue to make a claim, without such proof, then the claim is nil. The allowances statement must include the following:
- Information to identify the building
- The date of the earliest written contract for the construction of the building
- The amount of qualifying expenditure incurred on its construction or purchase
- The date the building is first brought into non-residential use
It is going to be critical that the purchaser obtains information from the seller as to the timing and amount of expenditure, so that an allowances statement can be produced. If the seller has not claimed, then some valuation of the qualifying SBAs will be required providing the main information requirements are met. To reduce administration, where there are multiple SBA claims, HMRC will allow several claims to be amalgamated together.
If the property is acquired from a developer who has not brought the building into use, then the calculation of the SBA is based on the lessor of:
- Price paid by the purchaser (excluding fees and SDLT)
- The original expenditure on the property
In summary, the introduction of a new capital allowance should be applauded by businesses, even if the application has been made more complicated, with the need to first abstract out all qualifying plant and machinery allowances and the need to maintain adequate records throughout the buildings history to provide an allowance statement on sale.
This article is a GUEST BLOG has been written by Nolan Masters of Veritas Advisory Limited a Capital Allowances specialist advisor with whom Harold Sharp work to maximise capital allowances for their property clients.