capital allowances made simple 8 march 2017 · 2017. 3. 8. · main types of allowances 1. on...
TRANSCRIPT
Capital Allowances Made Simple
8 March 2017
• What are capital allowances
• Who can claim and the benefit
• How to claim on different transactions
• Which properties qualify and which items
• Types of Capital Allowances
• Buying and selling
• Case studies
Contents
What are they?
• Government incentive for investment
• Legislation and case law
• Interpreted and applied by tax payers
• HMRC check claims
Current Position
• Favoured by Government, increase rates
• Complicated by trying to reduce abuse via legislation
• Increases the benefit
• HMRC lack of resources
Why are CAs important?
• Deduction against corporation or income tax
• Available where incur expenditure on commercial property
• Cash flow benefit
• Higher Equity / Lower L to V
• Only form of tax relief against property capital expenditure
How it WorksTax Return Without Capital
AllowancesWith CapitalAllowances
Rental income/Profit £1,000,000 £1,000,000Deduct allowable costs i.e. debt finance
(£500,000) (£500,000)
Capital Allowances 0 (£500,000)Profit subject to tax £500,000 0Tax to pay (@20%) £100,000 0
CAs in Tax Transparent Vehicles
• REITS / PAIFS• Don’t pay tax but legally must claim Capital Allowances• Used to reduce PID (amount must distribute to shareholders)
• Authorised Contractual Scheme (ACS)• Combine Funds / Encourage Onshore Investment• Offer SDLT & CGT exemptions• Complexities on calculating CAs on disposal of units and properties
Who can claim?YES
Institutions Property Co'sOverseas Investors Private IndividualsOthers
£36bn
NO
Pensions
£9bn
Who can claim? Common Misunderstandings
Traders, ie Retailers v Trading Stock
Capital Expenditure v P & L Expenditure
Overseas Companies v Overseas Properties
What Triggers Entitlement to Claim
Incur Capital Expenditure
Own Relevant Interest
Held as Investment
Capital Contribution
Make a Claim
Freehold vs Leasehold
Not Held as Trading
Capital Contribution Claims
• Know the legal position
• Who pays for what
• Structure agreement
Case StudyDrafted contract clause stated tenant (recipient) will get benefit. Invalid
Service Charges & Dilapidation Payments
• Claim if met by the service charge?
• Is the service charge taxed as income?
• Claim on receipt of a dilapidations payment?
Asset Management Budget
Landlord Tenant
Qualifying Property Types
Common Misconception / ErrorCan’t claim at all on ‘residential’ property
Typical Qualifying AmountsType Developments Acquisitions• Shopping Centre 30% - 60% 2% - 35%• Care Home 35% - 60% 6% - 35%• Office 35% - 50% 5% - 32%• Hotel 40% - 65% 2% - 35%• Car Dealership 25% - 40% 2% - 20%• Health Centre 30% - 45% 3% - 25%• Student Accommodation 7% - 15% 2% - 6%• Industrial Warehouse / Retail Parks 5% - 40% 1% - 30%• General Fit-outs / Refurbishments 55% - 95% n/a
Main Types of Allowances1. On reducing balance basis
18% Plant & Machinery8% Integral features & Thermal Insulation
2. In year of Expenditure (First Year Allowance)100% Annual Investment Allowance (£200,000)
Enhanced Capital Allowances150% Land Remediation Relief
Examples of Plant & Machinery
18% writing down allowance pa
Examples of Integral Features
8% writing down allowance pa
Examples of Green Tax Incentives
100% or 8% writing down allowance pa
Land Remediation Relief 150%
• Developers & investors• Land in the UK• Contaminated at acquisition• No subsidy or contribution• Polluter cannot claim• Relevant interest in the land• Tax credit
Claim Prep/ Rebuild & Land Value
How to Make a Claim
Client ReviewPortfolio Report
Advice on Disposal Agree Claim with
HMRC
Collate DocumentsEntitlement to
ClaimSurveyIncur
Expenditure
Maximise Claims
• Incorporate incidental expenditure• Claim all associated professional fees• Not just M&E expenditure• Claim at the highest writing down allowances• Capital vs Revenue• Timing of the claim – “when expenditure is incurred”
Case Study – First Tier Tribunal
Expenditure: £30m
Claim Value: £6m
Client: Overseas Fund
Cash Saving: £1.2m (4%)
Case Study – Retail Refurbishment
Expenditure: RetailRefurbishment
Project Value: £13m
Client: UK REIT Plc
Cash Saving: £7m (£6.3m)
Buying and Selling
• What do I need to do and when?
• Who should be aware of CAs and who should address the CAs?
• What are the angles?
• The seller says there are no allowances to pass across? What next?
Key CA Terminology in Simple Terms
• S198 election £2 v £TWDV
• Fixed Value Requirement Agree CA position
• Pooling requirement Insert figures in accounts
Acquisitions – Legal entitlement?
• Vendor – tax payer / pension / LA / offshore?
• Freehold / Leasehold Acquired?
• CPSEs
• Prior Owners Claim History
• Contract Wording – HOT stage?
Missed Claim Opportunities
Capital ContributionsTiming of ExpenditureCapital Contributions
Market Value v Actual Value
Non Tax Paying Tenants
Properties with Vacant Space
£2 s198 election
Unclaimed Historic Expenditure
Not ApplicableNo CAs Available
Case Study – Hotel AcquisitionExpenditure: Hotel
Value: £6.7m
Client: Private Investor
Cash Saving: £360,000 (5.4%)
Case Study – Industrial AcquisitionExpenditure: Industrial
Value: £2.3m
Client: Private Equity Investor
Cash Saving: £144k (6%)With £2 s198
Case Study – Shopping Centre AcquisitionExpenditure: Shopping Centre
Value: £23m
Client: Overseas Investor
Cash Saving: £850k (3.7%)Receivership Deal
Case Study – Office AcquisitionExpenditure: Office
Value: £5,000,000
Client: Overseas Investor
Cash Saving: £310,000 (6%)
Company Acquisitions
• Review for unclaimed historic expenditure
• Capital Contributions
• Capex reconciliations
Common Misconception / ErrorTime restriction to review historic expenditure
Surely all clients claim CAs….Don’t understand benefit
Think it is too late / No record of costs
Loss making or low tax rate
‘Too much effort’
Perception need to own property
Client assumes accountant or someone addressing it
Capital Allowances
Accountant
QS
Lawyer
Client
Capital Allowances – 2017 / 2018?
• Authorised Contractual Scheme
• Energy Efficiency Requirements / Lease Breaks
• UK Corporate Tax Reform
2017 / 2018 – Authorised Contractual Scheme
• Tax Transparent Fund Structure; Multiple Funds under one umbrella
• Taxed at investor level; CGT doesn’t apply to fund or non UK investors
• Value of UK ACS funds likely to exceed £250 billion by 2017*
• Operators of ACS able to elect to calculate
• Complexities calculating CA values* According to survey of Financial professionals undertaken by Northern Trust
2017 / 2018 – Energy Efficiency / Lease Breaks
• Energy efficiency regulations passed 26 Mar 2015
• Properties below ‘E’ energy rating by April 2018 unmarketable
• Acquiring non-compliant occupied properties – 6 months to comply
• Penalties range from £5,000 to £150,000
• Significant Capital Allowances potential
2017 / 2018 – UK Corporate Tax Reform
• Restriction of Carried Forward Losses to set against taxable profits
• Restriction to deduct interest expense and other financing costs
• Non-Resident Companies to be within scope of Corporation Tax?
Concluding Note• Agent Family Trusts, Private Investors, Occupiers often not advised
• QS / PM If no one asks for Cost Information no one is claiming!
• Lawyer Ensure contracts cover CAs adequately
• Accountant Valuing Land / Buildings / CAs; Ancillary costs
• Investor Never assume no allowances available without checking
• Occupier Check claims have been made on all expenditure
Clive CurdDip Prop Invest, MRICS, [email protected]: 0203 7937 154Mob: 07502 376 973
Nolan MastersMRICS, ATT, BSc (Hons)[email protected]: 0203 7714 315Mob: 07502 376 204
David GibsonMRICS, ATT, BSc (Hons)[email protected]: 0203 7714 316Mob: 07502 376 957
46 Blandford Street, W1U 7HTTelephone: 0203 1300 293www.veritasadvisory.co.uk