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Drafting For Purchase Contracts And CPSE Capital Allowances Responses

Since April 2014 the legislation has been substantially tightened for capital allowances when buying commercial property.

The allowances can be significant and often represent around 10%-25% of the purchase price of the property.  There are standard Commercial Property Standard Enquiries (CPSEs) for use by the property lawyers, intended to establish the extent of any allowances available to the buyer in acquisition.

In principle this is a good idea but in practice, without assistance of a capital allowances specialist, allowances are often lost for the following reasons;

  • Absence of appropriate contract wording to protect buyer’s position
  • Incomplete responses to CPSE replies
  • Changes in professional advisors and poor record keeping by the seller
  • Limited knowledge of capital allowances history of the property by the seller
  • Usually tailored capital allowances contract enquiries are needed to properly understand the seller’s position.

Background – Rule changes from 1 April 2014

Capital allowances previously automatically followed ownership of the property, if nothing was agreed between buyer and seller.

In contrast, under the HMRC Mandatory Pooling effective for transactions since 1 April 2014 the allowances available to the buyer will hinge on assistance given by the seller.  The buyer receives no allowances if the seller was entitled to allowances and nothing is agreed with them.

From April 2014 there is a 24 month window from the date of completion for the buyer to meet the legislative requirements in CAA2001 s187A.  Failing to do so means a buyer stands to forfeit any allowances they may otherwise be entitled to from the seller.

It is important the buyer makes the seller aware of their interest in capital allowances at the outset.  Lovell Consulting can supply appropriate wording for;

  • Offer letter
  • Heads of terms
  • Contract

It is important the buyer persuades the seller to cooperate as there is a risk of losing all allowances if nothing is agreed.  This presents an opportunity for both parties to maximise tax savings.

Action required of the seller

If the seller is a UK tax payer they must first claim their full entitlement to allowances, by including them in a tax return, before they can be passed to the buyer.  Secondly, they must sign a joint tax election with the buyer agreeing the quantum of allowances to pass to the buyer.  These are two significant hurdles with potential to disadvantage buyers without specialist capital allowances advice.

The positive is prior to exchange it is only necessary to gain the seller’s cooperation in principle to take the steps needed by including appropriate contract wording.

Pre-contract capital allowances enquiries

A new version of Property Standard Enquiries (CPSE.1 Version 3.3) was published in February 2014 in response to the new Mandatory Pooling rules.  However, without specialist assistance they are unlikely to elicit full details needed by the buyer.

The purpose of the CPSEs is to;

  • Establish whether plant and machinery allowances are available to pass to the buyer based on what allowances the seller has claimed and has also what they could have claimed
  • Establish potential value of those allowances
  • Understand what actions need to be followed, and when, in order for the buyer to become entitled to the allowances

Negotiations can follow receipt of seller’s detailed responses to enquiries to include in the contract the procedural steps needed for allowances to pass from the seller to the buyer.

Recommended Approach

In practice it is essential for capital allowances to be raised as early as possible in the transaction, preferably at offer letter stage / head of terms stage.  A specialist can provide appropriate contract wording particular to the circumstances of the case.

Without specialist capital allowances advice the seller may lose allowances and the buyer may not get any.  This is a potential professional indemnity risk for lawyers and accountants.  It is essential specialist advice is taken.

Article by Mark Hoskyns

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