Maximising Capital Allowances on Development / Refurbishment
Historically much of our capital allowances claims work has been on the purchase of second hand property. However we are being engaged more and more to maximise the capital allowances claimed on the refurbishment and / or redevelopment of commercial property. For example, at the time of writing we are undertaking a claim for the extensive refurbishment of a care home costing circa £350,000. The capital allowances claim on the original purchase of the property has already been completed so this is a new and additional claim. The capital allowances we are likely to be able to claim are in excess of £200,000 and as the owners are 40% tax payers in this case the tax benefit over time will be more than £80,000.
Why Make A Claim with a Specialist
Many property owners believe when they undertake improvements on their property their accountant will be able to analyse the invoices and extract the relevant capital allowances information. Unfortunately, although the accountant may be able to undertake this work, they rarely maximise the benefits of a claim. In many cases this is not the fault of the accountant but is due to two factors:-
a) The invoices are not detailed enough for the accountant to be able to analyse the qualifying from the non-qualifying expenditure
b) Due to the complexities of the legislation the accountant is, in many cases, unsure of what expenditure is claimable in the given circumstances.
I have had conversations with accountants in the past who have been honest enough to admit that they are only likely to be able to successfully claim 50% of any major refurbishment work. This can mean the client misses out on substantial relief.
Why Making a Claim Can Be So Worthwhile
When a company or individual(s) purchase a second hand commercial property the potential capital allowances claim for qualifying “fixtures” is arrived at by the means of a “just and reasonable apportionment” exercise. The cost of a second hand purchase can be broken down into theree elements namely:-
a) The purchase cost of the land.
b) The purchase cost of non-qualifying elements.
c) The purchase cost of qualifying elements.
Typically for the purchase of a hotel, care home or office the “fixtures” which qualify for capital allowances represent circa 25% of the overall purchase price. However if money is then spent on refurbishment or redevelopment of the property then 40% plus of this expenditure is likely to qualify for capital allowances purposes. The reason being the land has already been purchased and therefore additional expenditure is split just between qualifying and non-qualifying elements.
Don’t Forget the Annual Investment Allowance
The Annual Investment Allowance is currently set at £500,000 i.e. this level of capital allowances may be able to be claimed in any single financial period. However this is only possible where the relevant tax returns are open for amendment This means it is important where qualifying expenditure is incurred on refurbishment of a property that the analysis for capital allowances purposes is undertaken soon after completion of the works. With bigger projects it may even be beneficial for the capital allowances analysis to be undertaken as the work is progressing especially if the project crosses over financial periods.
This means from a tax perspective there has probably never been a better time to develop / refurbish commercial property provided the owners engage the services of a specialist such as ourselves to help them maximise their capital allowances claims.