There is a commonly held view that as UK pension funds are tax exempt they are unable to benefit from the tax savings arising from capital allowances. For this reason capital allowances have generally been ignored by pension entities. There is also some confusion with property lawyers and advisors in this area and this article seeks to provide some clarity.
However the fixtures legislation introduced in April 2014 means that UK pension funds should now carefully consider capital allowances when buying and selling UK commercial property. Under the 2014 legislation, pension funds are required to meet the fixed value requirements by way of a written statement when selling a commercial property. The written statement needs to confirm that the pension fund is exempt from income tax and corporation tax.
If a pension fund fails to do so, a future buyer could potentially be denied allowances or have a query from HMRC.
Where a pension fund buys a property from a tax paying seller a s198 tax election will also need to be entered into. While the quantum is unlikely to affect the pension fund it will impact on future tax paying buyers.
Pension funds now need to take a more considered approach to capital allowances when buying and selling properties. Therefore capital allowances specialist advice is needed to safeguard the capital allowances position and may increase marketability of their property assets.
When Buying from a Tax Paying Entity
If the tax paying seller does not wish to retain all the capital allowances claimed, the seller will need to pool the relevant historical expenditure and enter into a s198 capital allowances tax election with the fund under the fixtures legislation. Although the fund will not benefit from the allowances inherited following the sale, these allowances will be available to a future tax paying buyer and may subsequently enhance or restrict the marketability of the property.
If the tax paying seller wishes to retain all the capital allowances claimed, a s198 tax election is still needed to be entered into. It may be possible for the pension funds to negotiate a lower purchase price, as the fund will not benefit from the associated capital allowances tax relief. In practice this will only be possible if the pension fund considers this point early in the buying process. It will also depend on the strength or weakness of the UK property market at the time of the transaction and the purchasing power of the pension fund.
When Selling to a Tax Paying Entity
Non tax paying pension funds will not be able to pool expenditure or enter into a s198 tax election with a buyer. Consequently they will need to provide the buyer with a written statement to confirm they are a non-tax paying entity. Any unclaimed capital allowances will be passed on to the buyer provided there is no prior claim. Pension funds selling properties often are very favourable from a capital allowances perspective as there are often substantial unclaimed allowances. In view of this pension funds may wish to provide an indication of the potential allowances available to the buyer. This may means the asset may become more attractive to a potential buyer.
Where pension funds have incurred expenditure on development, refurbishment and landlord contributions there are also likely to be substantial allowances. It is necessary to carry out some research and valuable for the pension fund to keep good records for a future sale.
Non UK Registered Pension Funds Buying UK Sited Property
For non UK registered pension funds buying UK sited commercial property they will be required to file a UK income tax return and pay income tax on the rental income. UK capital allowances can therefore be claimed and this point is often overlooked.
When buying or selling property, it is important to obtain specialist capital allowances advice before opportunities are missed. It is imperative that the buyers and sellers position and intentions are set out early in the offer letter and heads of terms. To avoid any potential delay to transactions, it is important that buyers and sellers of commercial property have an accurate and useful exchange of information through the use of CPSE. It is recommended to use a specialist capital allowances firm as Lovell Consulting to achieve a positive outcome, including advice on contract clauses, written statements and signing tax elections.
Lovell Consulting purely specialises in capital allowances and has provided advice on capital allowances for thousands of commercial transactions throughout our 20 year history. Lovell Consulting has a highly skilled and expert team, dual qualified in surveying and tax.