Since the introduction of the Structures and Buildings Allowance (SBA) from 29 October 2018, Businesses and accountants need to consider […]
27 Oct 14 | Published by John Plumridge
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.
Capital Allowances Claims a must for Care & Nursing Home Owners
In a previous blog post we pointed out how financially beneficial a capital allowances claim could be for Hotel owners. Much of the information supplied in this previous blog is also relevant to Care & Nursing Homes whether owned by individuals or larger limited companies. This is because both Hotels and Care / Nursing Homes contain many of the same types of claimable “Plant & Machinery” for capital allowances purposes.
Care / Nursing Homes contain Plant
- Lifts
- Electrical Systems
- Catering Equipment
- Air-conditioning
- Heating & Ventilation Systems
- Sanitary equipment including toilets, baths and showers
- Signs
- Emergency Lighting
- Telephone & Wi-Fi Systems
- Fire detection equipment
- Hot & cold water system
Additional Plant
In addition to many of the common items found in other commercial property care / nursing homes homes contain items which are not commonly found in other buildings. Some of these include:-
- Emergency Call Systems
- Medical Equipment and Systems
- Electric Hoists and Bathing Aids
- Reception Desks
Making a Capital Allowances Claim
As a general rule the level of capital allowances claimable for a care / nursing home will fall between 20% to 30% (possibly more) of the original purchase price of the property. Although if an extensive development or refurbishment work has been undertaken this percentage can increase dramatically when the costs of purchase and refurbishment are added together. We have successfully completed a number of recent claims on care and nursing homes where the original purchase prices have ranged from £400k to £2m. The results of some of these capital allowances claims are detailed on our case studies page. If you own a care or nursing home (or you have clients who do) then please contact us for a free capital allowances claims estimate
To see Case Studies relating to Care and Nursing Homes you can click here
Key Takeaways
- Capital allowances claims can significantly benefit Care and Nursing Home owners, similar to Hotel owners.
- Common claimable items include lifts, electrical systems, catering equipment, and heating systems.
- Unique items for Care/Nursing Homes such as medical equipment and emergency call systems are also claimable.
- Typically, claims range from 20% to 30% of the property’s purchase price, potentially increasing with refurbishment costs.
- For a free estimate on capital allowances claims, owners should reach out for a consultation.
Hotels are particularly suited to a Capital Allowances Claim
As a rule Hotels are one of the most suited types of commercial property when it comes to making a claim for capital allowances. In this post we briefly state why this is the case.
Hotels Contain Plant
Hotels are rich in “Plant” which qualifies for capital allowances under the general “Fixtures” rules within the Capital Allowances Act 2001. Some of these fixtures include:-
- Lifts
- Air-conditioning
- Heating
- Sanitary equipment including toilets, baths and showers
- Signs
- Fire detection equipment
- Hot & cold water systems
- Wi-fi and telecommunication systems
Additional Plant
In addition to many of the common items found in other commercial property hotels contain items which are not commonly found in other buildings. Some of these include:-
- Swimming Pools
- Gymnasium Equipment
- Laundry Equipment
- Reception Desks & Bars
Items Creating Ambience
In addition to all of the above and more besides capital allowances are allowable on many items which create ambience. That these are allowable is as a result of a legal case of IRC v Scottish & Newcastle Breweries Ltd (1982) 55 TC 252. This means that items such as works of art, ornaments and bric-a-brac may normally be allowable for capital allowances purposes.
These items may also be allowable in other buildings where ambience is created for the benefit of customers such as Restaurants & Public Houses. However they would not be allowable in other commercial buildings such as Offices.
Making a Capital Allowances Claim
As a general rule the level of capital allowances claimable for a hotel will fall between 20% to 30% of the original purchase price of the property. Although if an extensive development or refurbishment work has been undertaken this percentage can increase dramatically when the costs of purchase and refurbishment are added together. Also luxury hotels may attract a higher percentage because of both the quality & quantity of eligible fixtures.
If you own a hotel or hotels (or you have clients who do) then please contact us for a free capital allowances claims estimate
What are Integral Features?
The rules on integral features were introduced in April 2008. Integral features are classed within the Capital Allowances Act 2001 (CAA01) as Plant & Machinery (P&M) and as such attract capital allowances.
CAA01 classes the following as an integral feature of a building or structure –
- an electrical system (including a lighting system),
- a cold water system,
- a space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system,
- a lift, an escalator or a moving walkway,
- external solar shading
Only assets that are on the list are integral features for P&M allowances purposes.
The rules also specifically clarify that the new definition does not extend to any asset whose principal purpose is to insulate or enclose the interior of a building, or to provide interior walls, floors or ceilings which are intended to remain permanently in place (S23(4) & S33A(6)). So if, for example, a business installs a new, permanent false ceiling in its premises, in order to conceal new wiring and service pipes, expenditure on that ceiling would not qualify for P&M allowances.
On the other hand, if a business installs in its premises a plenum floor or plenum ceiling, the principal purpose of which is to function as an integral part of the heating or air conditioning system (for example, the plenum floor or plenum ceiling may form the fourth side of a duct or channel through which stale air is extracted and treated air is discharged), that expenditure would qualify for PMAs as part of an ‘integral feature’ of the building or structure (CA22070 & CA22080).
Special 6% rate of Writing Down Allowances (WDAs)
Integral features are defined as ‘special rate expenditure’, which must be allocated to the ‘special rate pool’ and in respect of which the person incurring the expenditure may be entitled to WDAs at the ‘special rate’ of 6% p.a. Expenditure on the provision or replacement of integral features is one type of special rate expenditure. Other types are expenditure on thermal insulation and expenditure on long-life assets.
Conclusion
When undertaking a claim for capital allowances it is therefore important to determine when expenditure was incurred. This is to determine whether certain “fixtures” qualify as integral features and should therefore be allocated to the “special rate pool”. Alternatively where the expenditure on “fixtures” was incurred before April 2008 it may therefore qualify for the “main pool” where the WDAs were 20% p.a. (reduced to 18% as from April 2012)
The capital allowances legislation was changed in an effort to help define more closely those features which do qualify for capital allowances as CAA01 does not contain a definitive list of items which qualify as P&M.
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