Capital Allowance Advice

What are capital allowances?

Capital allowances are a deduction that can be made from a companies taxable profits.

A business cannot make a deduction for the value of capital items purchased (such as plant and machinery) when calculating its taxable profits or losses. Instead, capital allowances provide a form of tax relief that reflect the reduction in value of the capital asset over time. Essentially, the company can write off the cost of the capital assets over a number of years against their taxable income.

What types of expenditure attract capital allowances?

It is important to note that not all types of expenditure attract capital allowances.

The most common allowances that are available are:

• structures and buildings allowance – generally construction and renovation costs
• plant and machinery allowance – costs of acquiring certain plant and machinery
• annual investment allowance – relief in the year of purchase, on the cost of purchasing qualifying plant and machinery, subject to an annual maximum

How are capital allowances calculated?

There are complicated methods for calculating the different types of capital allowances. The advice of a tax specialist should be sought on how to apply the different types of capital allowances.

What happens to capital allowances when a property is sold?

A buyer of a property can obtain capital allowances if the seller has added the expenditure on capital items for the property to the capital allowance pool when they owned the property.

If the seller claimed capital allowances in respect of plant and machinery within the property, it will need to work out what part of the sale proceeds are related to the assets which qualified for capital allowances. The buyer will need this information in order to claim their own capital allowances after purchasing the property.

What should a buyer do when purchasing a property?

A buyer should investigate whether or not the seller has claimed any allowances and whether the seller has claimed all the allowances it could have claimed.

The buyer will want to find this out as soon as possible in order that they can ensure the seller agreed to pool its capital expenditure and take the steps necessary to preserve any capital allowances for the buyer.

If you need any advice on capital allowances, please contact a member of our commercial property law team in confidence here or on 02920 829 100 for a free initial call to see how they can help.