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Analysis - New structures and buildings allowance: what we know so far

Analysis New structures and buildings allowance: what we know so far

This article appeared in The Tax Journal on Friday 23 November 2018.

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The government has created a new capital allowance, seeking to meet the longstanding request by business representative groups.  From 29 October 2018, the structures and buildings allowance gives 2% straight-line tax relief for the construction, renovation or conversion of most non-residential structures and buildings located in the UK or overseas, where a UK tax liability exists.
A surprise in the Autumn Budget was a new capital allowance called the structures and buildings allowance (SBA). A technical note outlined its key features, but the Finance Bill 2019 just reproduced these and stated that CAA 2001 would be amended by regulations. The substantive statutory instrument will not be laid before Parliament until after royal assent of the Finance Bill.

What do we know so far?

In many respects, SBAs sound similar to the industrial buildings allowances (IBAs) that were abolished from 2011. Although SBAs will be more widely available than the former definition of ‘industrial’ buildings, the tax relief will be given at half the rate. The key aspects are set out below.
For both income or corporation tax purposes, SBAs will give a 2% flat rate writing-down allowance over 50 years for expenditure on most non-residential structures and buildings, located in the UK or overseas (when subject to UK tax). If allowances are not claimed, they cannot be carried forward to later periods and so will be lost. Notional allowances will be deducted for their period of ownership if expenditure is incurred by the Crown, or someone not within UK tax.
SBAs will not qualify for the 100% annual investment allowance (AIA). Fortunately, though, plant and machinery, including integral features defined by CAA 2001 s 33A, will continue to qualify for plant and machinery allowances (PMAs) and benefit from the AIA. It therefore remains essential to segregate these for tax, especially now the AIA has increased to a maximum of £1m. Where different provisions of CAA 2001 could apply, capital allowances can only be claimed once. So when PMAs are claimed, SBAs are not also available for plant.
Most normal capital allowances qualifying activities will benefit, except for furnished holiday lettings.
The claimant must have an interest in the land upon which the asset is constructed (e.g. a freehold or leasehold) and SBAs will then link to that interest.
Qualifying works will include new-builds and extensions, and conversion or renovation projects. Examples given include bridges and tunnels, offices, hotels, care homes, and retail and wholesale premises. It seems possible that qualifying assets might include most, if not all, of the assets listed in CAA 2001 s 21 (buildings) and s 22 (structures, assets and works) which do not qualify for PMAs. Written construction contracts (not just letters of intent), including for connected preparatory works, must be entered into from 29 October 2018.
SBAs will not be available for expenditure on:
An apportionment will therefore be needed for mixed use schemes. If use changes to a dwelling, then SBAs will stop.
Relief will be based on the original construction cost of the qualifying assets plus associated demolition or enabling works explicitly linked to the qualifying assets.
Claims will start when the asset first comes into business use, as long as not more than seven years has elapsed since the expenditure was incurred. Each separate structure or building, and tranche of expenditure (e.g. subsequent renovations or conversions), will have its own 50 year life. There is a proposed two year period of grace for temporary disuse (extended to five years if the building is damaged so extensively that it substantively no longer exists), after which time SBAs stop until a qualifying activity recommences.
On sale, there will be no balancing allowances or charges. Buyers will simply inherit the residue of expenditure not yet written-off for tax and there will never be an uplift resulting from apportioning an increased market value. Regrettably, the absence of balancing adjustments means that, in contrast to PMAs, claiming SBAs will reduce the owner’s capital gains base cost. Therefore, tax relief may be clawed back on disposal by increasing a gain. A similar effect can happen for PMAs through the capital allowances computation, but sellers and buyers have long had the flexibility to opt out of this by agreeing a CAA 2001 s 198 election at tax writtendown value or a lower amount.
If a new asset is bought from a developer, then an apportionment will be necessary to exclude the cost of the land. The government proposes that where the capital sum paid for a lease is 35 years or less, the allowances will stay with the lessor. However, sometimes the granting of a long lease for a large capital sum is substantively no different from a sale of the land (as was found in D Wellstead v HMRC [2016] UKFTT 492 (TC)). Therefore, for longer leases, where the capital sum paid is at least three-quarters of the total capital sum plus the retained interest, the lessee will inherit the capital allowances; but where it is less than 75% the lessor will keep the allowances.

What happens next?

Although the draft secondary legislation is not expected yet, SBAs are available from 29 October 2018 and advisers should make clients aware of this.
Also, the government is consulting on the definition of a dwelling, the treatment of overseas property, the transfer of allowances when leases are granted for a premium, and the proposed period of grace for disuse. If taxpayers or advisers wish to make their views known, HMRC has asked for representations to be sent to by 31 January 2019.

Tags for this article: capital allowances, structures and buildings allowance, SBA

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