In Tax Insider for January 2019, I wrote about the changes to capital allowances announced in Budget 2018, including the new structures and buildings allowance (SBA). This article provides more detail on the SBA, which gives a writing down allowance of 2% per annum (straight-line basis) of qualifying costs incurred on or after 29 October 2018.
Activity yet to commence
The 50-year tax life of the building commences when the building is first used.
However, where an asset is being constructed for a qualifying activity that has not yet commenced, the asset will not qualify at all if the qualifying activity commences more than seven years after the expenditure was incurred.
Damaged structures and repairs
If the building or structure is unable to be used due to damage (e.g. fire or flooding), allowances will remain available for a period of two years, allowing reconstruction work to take place. This two-year period may be extended up to five years, where the structure or building largely ceases to exist following extensive damage.
Any reconstruction expenditure will qualify for relief in its own right, with its own separate 50-year tax life. The eligible cost will be net of any compensation or insurance payments received.
Where a structure or building is demolished and not replaced, the owner can continue to claim the SBA on that asset, for the remaining term of the 50-year tax life.
Leases: who can claim
Commercial properties are often leased, which throws up the question of which party, lessor or lessee will be entitled to claim the SBA.
Where the granting of a lease is substantially no different from a purchase of the interest in land, the SBA will be allocated to the lessee. In contrast, the allowances will remain with the lessor if the term of the lease is less than 35 years.
Where neither of the above applies, a calculation will be required. If the amount paid as a capital sum for a lease [C] is ≥ 75% of the sum of:
- that capital amount [C]; and
- the value of the retained interest in the property (RV),
then the lessee will become entitled to the full amount of the SBA.
The income tax rules (ITTOIA 2005, s 277) treat part of a lease premium as chargeable to income tax, leaving the balance as capital proceeds. The latter is the ‘capital amount’ referred to above.
Example: Ralph Ltd leases a property to Jurgen Ltd
Ralph Ltd owns a building on which it claims the SBA. It then grants a 45-year lease over the entire building to Jurgen Ltd, which will use it in its trade. Ralph Ltd receives a premium of £30 million, but only a peppercorn rent is payable. Ralph Ltd’s retained interest in the property is agreed to be £8 million.
The income tax rules mean that, for a 45-year lease, 12% of the premium is chargeable to income tax, leaving £26.4 million (88% of £30 million) as capital proceeds.
Using the above formula, the proportion is: C / (C + RV). This is 26.4 / (26.4 + 8), i.e. 76.7%.
Because the lease is for over 35 years and the proportion is > 75%, Ralph Ltd is no longer entitled to claim SBA. Instead, Jurgen Ltd will do so.
Note that, when the lease expires in 45 years’ time, any remaining SBA will be able to be transferred to the person holding the retained interest at that time, if they hold their interest as part of a qualifying activity.
How much you receive as the capital sum for a lease may impact on your ability to continue to claim the SBA.
Lease of part of a property
Where only part of a property is subject to a lease, the ‘75% test’ will apply only to that part (i.e. allowances will transfer to the lessee, if the capital sum is 75% or more of the value of that part).
