Capital Allowances: Embedded Plant & Machinery
Finance Act 2012 amended the rules in relation to claiming capital allowances on fixtures for capital expenditure on the acquisition of property on or after 1 April 2012 (for companies) or 6 April 2012 (for individuals).
These rules make the availability of capital allowances to a Purchaser on the acquisition of a property containing fixtures conditional on the two parties agreeing a value to be attributed to the embedded plant (e.g. air conditioning systems, lift shafts, some mezzanine floors, water and electrical systems etc). The value should be agreed as part of the sale negotiations.
The purpose of the legislation is to ensure expenditure is only written-off once against taxable profits over its economic life. Where a purchaser wishes to claim capital allowances on fixtures in a property:
1. the past owner must have allocated its expenditure on the fixtures to a capital allowance pool prior to its sale of the property or must have claimed a first year allowance in respect of its expenditure. (However there is a transitional period for expenditure incurred on or after 1 April 2012 but before 1 April 2014 where this condition does not need to be met); and
2. a s. 198 CAA 2001 joint election must be entered into within two years of the buyer’s acquisition of the interest in the property or, on application of either the buyer or the seller within two years of the buyer’s acquisition of the interest in the property, the First Tier Tribunal must determine an amount of the purchase price to be apportioned to the fixtures
These provisions will not apply in circumstances where there has not been a previous owner who was entitled to claim capital allowances, for example, where a property had been purchased from the original developer of the building. However, they will apply if there has been a ‘past owner’ who was entitled to claim capital allowances, even if it was not that person who sold the building to the current owner.
The legislation is therefore likely to result in additional due diligence requirements when purchasing from persons that are unable to claim capital allowances in order to discover whether capital allowances will be available to the Purchaser, or to any future Purchasers of the property.
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