‘Section 198’ capital allowance elections are joint elections between a buyer and seller that sets the value of fixtures and fittings when a commercial building changes hands. Although they are not mandatory, without one, buyers and sellers could be left in a precarious position.
Tax relief is available on capital expenditure on certain fixtures and fittings by way of capital allowances. These allowances can be claimed on fixtures and fittings at differing rates depending on the type of expenditure. There is an 18% writing down allowance for Main pool items (such as racking, signage and sanitary equipment) and a 6% writing down allowance for Special Rate pool items (such as electrical, heating and lighting systems).
Furthermore, buyers can claim an ‘annual investment allowance’ on up to £1,000,000 of qualifying expenditure. This is set to reduce to £200,000 from 1 April 2023.
The value of the fixtures and fittings on a second hand commercial property transaction should to be agreed by both the buyer and seller within 2 years of completion by way of an ‘section 198’ election. Usually, the buyers want the highest possible value, whereas sellers want the lowest value. This is because buyers want to maximise how much capital allowance can be claimed going forward, and sellers wish to retain the benefit of the allowances they have already claimed.
Even if the buyer and seller agree to a value of £1 for the fixtures and fittings, an election should still be made. If the seller has claimed allowances of fixtures and fittings and an election has not been made, HMRC are able to attribute a value to the fixtures on a ‘just and reasonable’ basis. In theory, without an election, HMRC could claw back all of the allowances previously claimed by the seller, and the buyer would also not benefit from any allowances going forward.
Therefore, it is recommended to give consideration to the election as early in a commercial property transaction as possible. The election can be made up to 2 years after the transaction, however it is much more prudent for this to be completed and signed on completion of the property transaction.
If you are considering buying or selling a commercial, please do not hesitate contact us. We are happy to work with your solicitors to ensure the best possible outcome for your business.
This article is from the latest issue of our Construction, Land and Property Bulletin - Spring 2022. To receive future copies of any of our newsletters directly to your inbox please visit our preference centre and register your interest.
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