Michael Doree, a London-based capital allowance consultant at Catax Solutions, explains how landlords and property owners could be missing out financially by not claiming the capital allowances to which they are legally entitled.
Given the current housing shortfall, relaxing the planning rules to allow more office-to-residential conversions makes sense; but it doesn’t make sense for commercial property owners not to receive the tax relief that is their right by law. But if developers rush into converting a property without making a claim, this is exactly what could happen.
For smaller properties, owners are likely to be entitled to hundreds of pounds of relief, but for larger properties, relief can run into many thousands of pounds. Commercial property owners should be aware of the implications of capital allowances, which were included in the 2012 Finance Bill (and which came into force in April 2014).
The key change in legislation is that landlords must now identify and document capital allowances at the point at which a property is bought or sold. If they fail to do so, their right to tax relief is lost and it is estimated that around £84m was lost in just the first three months after the law changed. The government has tightened the rules on capital allowances and made owners jump through more hoops to gain relief, but for some the gains from doing so can be significant.
Owners of commercial properties are entitled to tax relief on anything related to the intrinsic fabric of the building: from air conditioning systems through to radiators, lifts and lighting fixtures. These are called capital allowances. The amount that can be claimed against them varies from property to property and is significantly more for some property types, such as hotels, compared to others (such as industrial units), but it averages out at about 20% of the purchase price.
However, if a claim is not made at the appropriate time, then owners lose the right to tax relief. This can represent a significant loss. It’s estimated that the landlords behind the 4,000 office-to-residential applications — filed between April 2014 and June 2015 — are set to miss out on at least £72m of capital allowances, if they go ahead with their plans.
This estimate is based on the conservative assumption that the average value of the individual properties is only £500,000 and that one in 10 landlords will fail to make a capital allowances claim. If you are considering converting a commercial property for residential use, or selling it on to a residential developer, then you need to make a capital allowances claim before or at the point of sale.
It is therefore prudent for landlords to take professional advice on capital allowances before a conversion to residential or they may lose their right to tax relief.
For more information visit contact Michael Doree
T: 020 3393 2204 | M: 07792 471 507