Capital Allowances: Important Changes for Hoteliers

This month sees a change in capital allowances, but are you prepared? CBRE director, Graham Burrell, explains to Hotel Industry Magazine what UK hoteliers need to know.

Note: This article originally appeared in the Q1 2014 issue of Hotel Industry Magazine.

Anyone looking to buy or sell a hotel or other commercial property asset must be aware of the new changes in legislation concerning capital allowances.

This has the potential to significantly benefit you if you understand the implications.

It also has the potential to cost hundreds of thousands of pounds if you are not aware and don’t seek professional advise during the due diligence stage of a property transaction.

What’s more, the impact of these changes on the hotel industry will be felt to a greater extent than many other industries, as the value of fixed assets contained with hotel buildings are higher than most other industry types, and additional claims can be made for various assets that provide ambience.

So what are capital allowances?

Capital allowances are a form of statutory tax relief available for capital expenditure incurred on fixtures within most buildings.

They enable you, as a UK tax payer, to write off relevant expenditure against taxable profits and income, resulting in a substantial increase in post-tax profits and income.

Can anyone claim them?

Capital allowances are available to all investors and occupiers liable for UK tax including UK based companies and individuals investing in assets at home or abroad, and offshore or foreign companies and individuals investing in the UK.

What has changed?

From April 2014, in order to claim capital allowances on a property acquisition, purchasers will need to ask the seller (if the seller is a tax paying entity) to ‘pool’ any qualifying expenditure prior to sale.

In addition, both parties will have to agree the value that is to be transferred upon sale, via a Section 198 Election, within a two year period.

Failure to meet these new requirements may result in any qualifying expenditure being treated as ‘Nil’.

Not only this, but any future purchasers of the building will also be restricted to this figure.

This is a radical departure from current long standing practice, such that up until April 2014 there was no time limit for claiming capital allowances on the acquisition of a second-hand property.

The new owner of a property simply had to research the tax history back to 24 July 1996, to satisfy HMRC that there had been no prior claim made by a previous owner.

How will this affect me when selling a property?

The changes are of such magnitude that failure to have comprehensively addressed capital allowances and undertaken appropriate action in the lead up to exchange of contracts, may result in a reduced sale/purchase price to accommodate the loss of any potential qualifying expenditure (see the worked example below).

Worked Example:

A hotel is bought:

  • after April 2014
  • for £100m by a tax paying entity
  • with capital allowances worth £30m

During the course of their ownership, the new owner fails to ‘pool’ the qualifying expenditure available on the property.

The same hotel is put back on the market:

  • in 2019
  • asking price of £150m
  • with capital allowances now worth £45m

If the Seller has not ‘pooled’ all qualifying expenditure prior to sale, the new purchaser of the building will not be able to make a claim for capital allowances purposes.

The potential loss to a Corporation Tax paying entity is in the region of £9.5m. This will not only affect their tax position, but it may also have an impact the future property value.

Who will benefit and who will lose out?

The winners will undoubtedly be those who seek advice and operate within the new rules.

Assuming they are appropriately informed, those most likely to benefit are sellers of properties ‘rich’ in fixtures, who are chargeable to UK tax and who have not pooled the allowances, because clearly there is a deal to be done here with the purchaser.
Other beneficiaries are sellers who are not chargeable to tax (such as pension funds) where there have been no prior owners to April 2014.

These properties will typically be more attractive to purchasers compared to a similar property being sold by a seller who is within the charge of tax who has not ‘pooled’ the qualifying expenditure.

The losers, as the worked example clearly demonstrates, are purchasers of properties from April 2014 onwards where the previous owner, as a tax paying entity, has failed to ‘pool’ all qualifying expenditure, as any available allowances may be treated as ‘Nil’.

Thankfully, there are some exemptions in place.

Are there any exemptions?

There are some exemptions in place as the new rules come into force—but only if very specific criteria are met.

The following transactions and issues will not be affected by the revised legislation:

  • The grant of a leasehold interest for a capital sum – where the right to the allowances is not passed to the lessee.
  • The entitlement of purchasers who acquired prior to April 2012 and who continue to own the property
  • Capital allowances relating to capital contributions
  • Purchase of an SPV (although the SPV itself may come under the revised legislation)
  • The purchase of a new unused property from a developer trader
  • Pension fund purchasing a property from a pension fund where no prior qualifying owner had owned it
  • The entitlement of purchasers who acquire a property from a pension fund where no prior qualifying owner had owned it
  • The entitlement of a purchaser to claim integral features on a property, where the seller or a prior owner was not entitled to claim integral feature

Should details about capital allowances claims be included in vendor packs?

Yes. We would always recommend that our clients include capital allowances within a vendor pack/sales particulars.

This provides any future purchaser with an informed view on what will typically be available, such that it could also lead to increase bids in some cases; particularly if you are selling to a high net worth individual.

What about chattels?

In our experience, there is often a separate price attached to “chattels” (loose assets) in hotel deals and this can be a significant contributing factor to the total sales price.

These chattels fall outside a Section 198 election and are also treated differently for tax purposes.

The hotel industry is renowned for providing poor supporting cost documentation and records, so early engagement to audit the available information is essential.

When advising on a sale which includes chattels, we generally split the purchase price between chattels, fixed plant and machinery, the land and the building structure in the most optimum fashion.

So although capital allowances may not, until recently, have been high on the pecking order of priorities when acquiring a property, this will now be a crucial part of the sales process.

Ignorance will result in an underclaim in tax relief, not just for the first property transaction but for the value of the property for the rest of its life.

The gradual reduction and now complete removal of tax relief on hotel building structures make it more important than ever to consider other reliefs that may be available on hotels.

This industry has much to lose, but also much to gain, from these changes. It is entirely dependent on getting the right advice and acting promptly.

Note: This article originally appeared in the Q1 2014 issue of Hotel Industry Magazine.

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