Posted: 8th September
Capital allowances hot topics
Below, Martin Dye, who heads up RLF’s capital allowances and property taxation service, looks at three recent trends in the way we are adding value to our clients:
- 150% relief for cleaning up contaminated land and buildings
- Capital allowances on residential schemes, and
- The impact of the new capital allowances rules for acquisitions post April 2014
With the construction and real estate sectors starting to pick up, we are starting to see more clients with an appetite to look at schemes that may have seemed too risky in recent years.
Although the various tax reliefs available to property developers and investors have been around for a number years, we are still helping clients to ‘discover’ these reliefs and tax savings they are entitled to.
With this as the backdrop, we take a look at three recent trends in the way we are adding value to our clients:
150% Contaminated land remediation relief (CLRR)
We are currently assisting a number of residential developers who have seen their land remediation costs spiral.
As more clients take on brownfield developments or refurbish old properties CLRR is becoming more valuable.
CLRR provides 150% corporation tax relief for the additional costs of dealing with contaminated land and buildings, including the removal of asbestos and Japanese Knott Weed.
Effectively, this relief provides a £150 deduction against your business’ taxable profits for every £100 of qualifying remediation expenditure you incur.
The relief has the added benefit that, if it creates a loss, the losses can be surrendered in return for a cash payment equal to 16% of the loss.
For example, we are assisting a developer that has recently incurred costs of over £600k (partly unbudgeted) on removing asbestos from an old 1960’s office block. The development is spread over a number of phases and, due to initial upfront costs before sales, is likely to be loss making in the early stages.
Here, CLRR of £900k (£600 x 150%) is likely to be available, meaning the developer has two options:
- Carrying the losses forward to reduce their future tax liability by approx. £180,000, or
- Surrendering the losses of £900,000 in return for a cash payment of £144,000
In this instance the developer was referred to us by the project architect. Following our initial meeting, it was then able to go back to the client with positive news that we could help reduce its remediation costs and free up money for elsewhere on the project.
Capital allowances on residential sector schemes
We are continuing to be able to assist clients who “didn’t think capital allowances were available on residential developments”.
Although it is true that capital allowances are not available for residential ‘dwellings’, they are available for plant and machinery in core or communal areas including lifts, shared facilities or community heat and power schemes.
With land becoming more and more expensive, and increased pressures to improve density and the number of ‘new builds’, capital allowances can help improve the viability of inner city developments.
This is particularly relevant for the increasing number of clients considering large scale private rental schemes, who should be factoring the tax savings into their early appraisals and costings.
Property acquisitions – Importance of considering capital allowances at the time of acquisition
We are now starting to see the impact of the new capital allowances rules, for property acquisitions post April 2014, coming through.
From 1 April 2014 a purchaser can only claim capital allowances if the vendor has identified the fixtures qualifying for capital allowances fixtures and agreed their disposal value.
We recently assisted a property investor who had acquired a large hotel. The vendor was entitled to claim but, for various reasons, had not identified any capital allowances.
Unfortunately, this came to our attention after the transaction so the only options open to them were to:
- Miss out on the valuable capital allowances and tax saving available on the property, which would then be irrevocably lost, or
- Go back to the vendor and offer to prepare a capital allowances survey and report for them, ask them to amend their tax returns to reflect the qualifying expenditure, and agree a capital allowances disposal value; all after the event.
This highlights the importance of considering capital allowances at the time of the property acquisition and as part of the due diligence process.