10/9/2019 CAPITAL ALLOWANCES 9 OCTOBER 2019 1 WHAT ARE CAPITAL - PDF document

10/9/2019 CAPITAL ALLOWANCES 9 OCTOBER 2019 1 WHAT ARE CAPITAL ALLOWANCES  Government tax incentive – not a “scheme”  Determined by legislation and 100 years of case law  Interpreted and claimed by tax payers; not automatically given  If not claimed then the tax payer misses out but can look back  HMRC check claims are correct 2 WHAT IS THE BENEFIT OF CLAIMING CA  Deduction against corporation or income tax  Creates a cash flow benefit and increases return on investment  Lower tax rate environment, but increased proportion of tax to pay  Only form of tax relief against property capital expenditure 1 3

10/9/2019 HOW IT WORKS Basic Without With Tax Return Capital Allowances Capital Allowances Rental Income / Profit £2,000,000 £2,000,000 Deduct Allowable Costs (£1,000,000) (£1,000,000) i.e. Debt Finance Capital Allowances No Claims (£1,000,000) Profit Subject to Tax £1,000,000 0 Tax to Pay (@ 20%) £200,000 0 4 CASH BENEFIT OF £1M QUALIFYING EXPENDITURE 5 MAIN TYPES OF CAPITAL ALLOWANCES  18% Plant & Machinery Allowances  6% Integral Features and Thermal Insulation  100% Enhanced Capital Allowances (applicable until April 2020)  100% Annual Investment Allowance (£1,000,000)  2% Structures and Buildings Allowances (new contracts post 29 October 2018)  150% Land Remediation Relief 2 6

10/9/2019 CASH FLOW BENEFIT OF £1M  Benefit claimed over a number of years  Claim the relief at different rates  Can carry forward unclaimed allowances  Utilise AIA of £1m on expenditure up to 31 Dec 2020 Tax Planning Need to analyse the expenditure to claim the relief at the highest writing down allowances available 7 HOW TO UNLOCK THE BENEFIT Hold as investment Non Incur capital Tax Free Qualifying Fixtures Capital expenditure Own the relevant interest in land 8 CLAIM OPPORTUNITY 1 - ON ACQUISITION  Claim on second hand fixtures  Who has entitlement, one claimant per fixture  Valuation exercise of building, land and P&M Tax Planning Have two years to agree value of Capital Allowances, contract provision critical to enable purchaser to address post completion 3 9

10/9/2019 CLAIM OPPORTUNITY 2 - ON DEVELOPMENT  Available on certain qualifying fixture  Based on actual costs incurred  Apportion certain allowable costs Tax Planning Accelerate basic rates of tax relief for energy efficient plant & machinery, must be certified at the time of expenditure 10 CLAIM OPPORTUNITY 3 - ON LEASE INCENTIVES  Type of lease incentive  Who pays for what  Structure agreement Tax Planning If contribution paid towards expenditure qualifying for capital allowances, tenant can treat as non taxable income receipt 11 CLAIM OPPORTUNITY 4 - REFURB OF CORES  Capex reviews, capital vs revenue  Assist cost feasibility  Recovery via the service charge Tax Planning Consider empty voids where landlord contributes to service charge pot 4 12

10/9/2019 CLAIM OPPORTUNITY 5 - FULL REFURBISHMENT  Main structure already in place, higher qualifying %  Claim incidental expenditure under s25  Capital vs revenue considerations Tax Planning Allowances available where the thermal qualities of a building are improved 13 ACQUISITIONS – 3 STEPS  Entitlement  Eligibility  Valuation 14 ACQUISITIONS - ENTITLEMENT  Fixed Value & Pooling Requirement  S198 election / Tribunal / Written Statement  Relevant interest acquired?  Historic Property Ownership  Timing of Historic Expenditure  CPSEs / Questions / Contract Wording  Allowance Statement - SBAs 5 15

10/9/2019 ACQUISITIONS – ELIGIBILITY & VALUATION  Eligibility  Ownership of Fixtures  100% v 18% v 6% v 2%  Valuation  Measurement – Land & Buildings  Costs From 1 st principle at Market Value as New  HMRC Apportionment Multiplier Purchase Price x Plant and Machinery Land + Building + Plant and Machinery 16 INCREASE CLAIM OPPORTUNITIES ON ACQUISITI ONS Never Assume No Allowances Are Available Irrespective What Advised by Seller….. No CAs Why? On basis of who’s entitlement position? Available £2 s198 What is included or excluded within the election? Election Not Not true - Capital Allowances now applicable on every transaction Applicable 17 INCREASE CLAIM OPPORTUNITIES ON ACQUISITIONS Timing of Expenditure Pre / Post April 2008 Capital Contributions Fall Outside of s198 election Non Tax Paying Tenants s181 - Claim on tenants fit out Properties Acquired Vacant / Part Vacant Potential claim on retained fixtures Unclaimed Allowances Property Fixtures v Loose Equipment S198 elections Check inclusions / exclusions 6 18

10/9/2019 CASE STUDY - SHOPPING CENTRE ACQUISITION Barrier: Acquired with £2 s198 Election in Place Value: £345,000,000 Client: UK REIT Background: Acquired 2 Assets a) Taxpayer with £2 Election b) Council who Developed 17 Capital Contributions Made by Vendor 19 CASE STUDY - COMPANY ACQUISITION Barrier: CA Position Silent and No Info Provided Value: £50,000,000 Client: Overseas Investor Cash Saving: £1,500,000 20 INCREASE CLAIM OPPORTUNITIES ON CAPEX SPEND  S25 Works / Ancillary Costs  Qualifying Demolition Costs, Reports, Fees  Floors, Walls, Ceilings, Cladding, Roofing Qualifying for Capital Allowances  Plenum / Moveable / Thermal / Trade Related  Revenue Deductions – Contract Documents Don’t Clearly Identify These Items Out  Structure Grants or Contributions  Specialist Structures  Historic Expenditure – time restriction and lack of cost information?  Irrecoverable VAT 7 21

10/9/2019 MISSED CLAIMS – GRANT ALLOCATION & VAT Case Study – Barrier to Claim – Failure to Efficiently Allocate Grant & Consider VAT Implications • £1,300,000 Final Account for Extension Grants received • • NHS £500,000 • Adjacent Pharmacy £670,000 • Perceived negligible claim available by CA advisor Methodology • Review both grants for specific allocations • Treatment of VAT within grant amounts • Allocate grants to non qualifying direct expenditure • Consider s25 expenditure • £205,000 tax saving split between 5 Partners 22 WHO IS UNDERCLAIMING? Widespread but particularly: Family Trusts Historic & Current Expenditure   Non Property Sectors  Occupiers (retail, restaurant, office)  GPs, Dentists, Care Home Owners  Offshore Investors Ability to offset tax, but…. 23 CORPORATION TAX REFORM  Increased future tax liability for Offshore Companies April 2019 CGT applies. Most effect in 3-4 years time April 2020 Tax rate reduced from 20% to 17%, but Restriction on deductible interest to value of £2m across Group  Capital Allowances will become more important to offshore investors What Next? Plan for future tax liabilities. Claim now and build up allowances 8 24

10/9/2019 STRUCTURE AND BUILDING ALLOWANCES “SBA” New Allowance Over 95% of a building will now qualify for tax relief 2% per annum, should I claim? Tax saved £350,000 over 10 years on £10m Industrial unit Paid back on disposal 25 STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS)  Contracts Entered Into after 29 October 2018  Available on Construction and Purchase  Excludes residential (incl student accommodation), but allows hotels, care homes  2% per annum for 50 years  New build, refurbishments, extensions and fit outs  Applicable to Capital Contributions  Cannot Claim Annual Investment Allowance on SBA  Applicable from later of date first brought into use and date expenditure incurred  CGT liability on Sale – increases sale proceeds on sale for CGT  Excludes disposal to connected person  Cash saving v Cash flow 26 STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS)  Sale of Unused Building (other than by developer)  Qualifying Expenditure is lesser of purchase price & construction cost  Sale of Unused Building by Developer  Qualifying Expenditure is purchase price  On Sale amount of SBA to Purchaser is Nil Unless Allowance Statement is Met  Date of earliest written date of contract  Amount of qualifying expenditure  Date brought into use  Lease over 35 years,  Claim depends on market value less than 1/3 retained 9 27

10/9/2019 STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS)  Excluded Expenditure:  Acquisition of Land and associated costs, SDLT  Land Remediation  Landscaping (other than to create a structure)  Costs in Connection with Planning permission  Items qualifying for Plant and Machinery  Items that may be allowed as a deduction in calculating profits  Fees relating to any excluded expenditure 28 STRUCTURAL AND BUILDINGS ALLOWANCES (SBAS)  Industrial Build Cost = £10,000,000  P & M and Integral = £1,000,000  SBA = £9,000,000  SBA per annum = £180,000  Cash benefit pa at 19%= £34,200  After 10 years = £342,000 Tax Planning Claim plant and machinery and integral features first 29 CAPITAL ALLOWANCES £10M OFFICE– TIMING OF 4.5 4 3.5 3 2.5 £million 2 1.5 1 0.5 0 1 2 3 4 5 6 7 8 9 10 Years SBA 2% Integral 6% Plant&Mach 18% AIA£1million Enhanced 100% Land Remed 150% 10 30