New era for capital allowances
Annual Investment Allowance
Budget 2018 brought change to the capital allowances regime, including a two-year increase in the Annual Investment Allowance (AIA). This rises from £200,000 to £1 million for expenditure incurred on or after 1 January 2019.
The £200,000 limit currently in existence gives 100% tax relief on expenditure on qualifying plant and machinery (but not cars) for businesses and owners of commercial property. For a business planning more major expenditure, the new limit will be welcome news. Please speak to us if your accounting year end spans the 31 December 2018 cut-off, to ensure that you maximise qualifying expenditure.
New Structures and Buildings Allowance
A new capital allowance, the Structures and Buildings Allowance (SBA), will give relief for expenditure on certain structures and buildings. Since the ending of Industrial and Agricultural Buildings Allowances, no relief has been available for most structures and buildings. The SBA addresses the gap, and is intended to encourage investment in construction for commercial activity.
Relief will be given on eligible construction costs incurred on or after 29 October 2018. Where a contract for the physical construction work is entered into before this date, relief is not available. The rules are subject to consultation, but the broad proposals are as follows below.
The SBA will be available for new structures and buildings intended for commercial use, and the improvement of existing structures and buildings, including the cost of converting or renovating existing premises to qualifying use.
Relief will be available to businesses chargeable to income tax and companies chargeable to corporation tax. It will be limited to the original cost of construction or renovation, and given across a fixed 50-year period, at an annual flat rate of 2% regardless of changes in ownership.
When the asset is disposed of, the purchaser will continue to claim the annual allowance of 2% of the original cost if the asset continues to be used for a qualifying activity. There will be no balancing adjustments on sale for the vendor. For chargeable gains purposes, the allowable cost of the asset will be reduced by the total amount of relief claimed.
Relief for the SBA will be available from the date the structure or building is brought into use for the first time for a qualifying activity. UK and overseas structures and buildings will be eligible where the business is within the charge to UK tax.
Special provisions will apply for leasing transactions. Where an asset is leased, both lessor and lessee may be able to claim the SBA for qualifying expenditure that they themselves incur on construction works. However special rules will apply where the grant of a lease is substantially the sale of the property interest. These rules may result in the lessee becoming entitled to the attributable SBA.
Only certain expenditure will qualify. The structures or buildings must be brought into use for qualifying activities. These include trades, professions or vocations, and certain UK or overseas properties businesses - essentially commercial property lettings. The type of structures and buildings covered awaits final clarification, but is expected to include: offices; retail and wholesale premises; walls; hotels and care homes; factories and warehouses.
Exclusions and apportionment
Expenditure on land or residential property or other buildings functioning as dwellings will not be eligible. What constitutes a dwelling is to be clarified. University, school or military accommodation, and prisons look set to be classed as dwellings. Work spaces forming an integral part of a dwelling, such as home-offices, will not be eligible. With mixed use, such as between commercial and residential units in a development, relief will be apportioned.
Please do contact us for advice on tax-efficient expenditure.