Capital Allowances and Leasehold Improvements

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Good News for Leaseholders

People often ask us if a tenant may claim capital allowances on leasehold improvements. The answer is tenants are able to claim capital allowances where the expenditure is capital in nature. Therefore if you are fitting out a retail unit, making a major redevelopment of an office or installing air conditioning in an industrial unit, you may be eligible to claim capital allowances on your expenditure. In the past there has been some confusion on this subject. Legally when a tenant is fits “Plant & Machinery Fixtures” (sometimes referred to as “Integral Features” and / or “Embedded Fixtures”) to a property they become legally part of that property. That is if they cannot be easily removed without causing damage. For example if a tenant installs a new electrical system, stripping it out at the end of the tenancy would cause damage to the property. Some professional advisers have therefore concluded the tenant could not claim capital allowances on these leasehold improvements as they have become legally part of the property and therefore belong to the freeholder / owner. However, and this is the good news, the Capital Allowances Act 2001 only requires the business or person which incurs the capital expenditure to have an “interest in the land”. A leasehold / tenancy agreement creates this interest and therefore the tenant may potentially claim the capital allowances. This creates the slightly odd position where the tenant, may not legally own the “Plant and Machinery Fixtures”, but as they have incurred the expenditure and are using the fixtures within their trade / business they are able to make a capital allowances claim.

Freeholder / Property Owner Contributions to Leasehold Improvements

Where the freeholder / owner of a property makes a contribution to the leaseholder improvements that are being made they will be entitled to claim capital allowances proportionally on their contribution to the cost of the “Plant and Machinery Fixtures”. However there are situations where the freeholder / owner is not entitled to claim capital allowances e.g. they are a pensions company or have charitable status. In the above circumstances it is worth the tenant, who is undertaking the leaseholder improvements, signing a separate agreement with the freeholder / owner so the costs of any improvements are allocated in the most tax efficient way possible for the tenant. That is to say that those “Plant & Machinery Fixtures” costs which qualify for capital allowances are attributed to the tenant in the first instance while non-qualifying costs are met by the freeholder / owner. In this way the tenant maximises their capital allowances claim for the leasehold improvements. We are experienced in advising tenants with regards to capital allowances claims for their leasehold improvements. This includes the preparation of agreements to ensure costs are allocated to the best advantage of the tenant. You can contact us either directly by phone or e-mail or by completing either our “Free Capital Allowances Estimate Form” or our “General Contact Form”