Judging by the searches on our website the most popular topic at the moment is Section 198/199 Tax Election Agreements. This is not surprising given that there have been changes in the capital allowances regime which came into effect in April 2012 with even more far reaching changes on the way in April 2014 (see our previous blog)

The Importance of the S198 Tax Election Agreement

If and when a commercial property comes to be sold the seller may or may not have claimed capital allowances on the plant &  machinery  “fixtures” within the property.  Where there has been a claim for such “fixtures” the S198 Election Agreement must, amongst other things, contain sufficient information as to provide the details of which fixtures have been claimed and the value at which those “fixtures” are being transferred to the buyer. There are two important points to note here namely:- i)  by identifying the “fixtures” on which capital allowances have been claimed it also by default may help to identify “fixtures” which may not have been subject to a claim. This is why it should not be assumed, as shall be demonstrated later, that because the sale contract contains a tax election agreement that a further claim for capital allowances may not be possible. ii) where “fixtures” have been claimed the values allocated to them are the disposal values for the purchaser which must be brought into account and the acquisition value for the buyer which will again be brought into their accounts.

S198 Tax Election – Case Study

The importance of the S198 Election Agreement being completed correctly can be illustrated by the following real life example. We were contacted by the prospective buyers of a £1m commercial property in London. They had been advised by their accountant to seek specialist advice on the capital allowances situation before completion. This in itself is a concern because it would appear that the advice did not come from their conveyancing solicitor who would be best placed to offer this advice. We obtained a copy of the draft contract for the sale of the property and it did indeed include a S198 Election Agreement. However none of the “fixtures” which it was sup[posed to apply too were listed and further more everything had been valued at £nil. We informed the prospective buyers that potentially, in their hands, there were between £200,000 t0 £300,000 of capital allowances to be claimed and therefore it was imperative that the “fixtures” which had been previously claimed were identified and there transfer value negotiated.

The Benefit of using a Capital Allowances Specialist

To cut a long story short we were asked to speak to the “vendors” accountant on behalf of the purchaser and it was apparent that the purpose and importance of the S198 Election Agreement was not understood. We eventually established there had only been a very limited capital allowances claim for “fixtures” and eventually after much discussion and numerous e-mails the relevant “fixtures” were identified within the S198 Election Agreement at a low “Tax Written Down Value” (TWDV). Unfortunately this led the “Vendors” solicitor to comment that the the subsequent benefit for the “Buyer” was going to be minimal. In-fact the potential overall tax benefit is likely to be in the region of £50,000 for the buyer as we are now free to claim on a multitude of fixtures not claimed for by the seller.


It the above scenario, had we, or another capital allowances specialist not become involved the original S198 Election Agreement could well have been interpreted by HMRC as meaning that all “fixtures” were included and therefore all valued at £nil for disposal purposes. This would have prevented us from making a substantial claim for the buyer. The importance for accountants and solicitors to understand the issues around both S198 (freehold) or S199 (leases) Tax Election Agreements has never been higher. The need to understand them will grow even more in April 2014 when a capital allowances review should become an integral part of any Commercial Property transaction.