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Plant Allowances on Purchases

Capital Allowances Guidance for Property Conveyancing Solicitors

This article was first published in Solicitors Journal (the leading weekly magazine for the legal profession) on Friday, 2 February 2007 and is reproduced by kind permission (


Capital allowances are an important tax relief on the construction or purchase of commercial property. They are available to both owner-occupiers and property investors, and can generate substantial tax savings (often equal to 10 per cent of the property cost). However, capital allowances are commonly overlooked. There are several reasons for this, but ignoring allowances can generate significant risk for solicitors and their clients.


Capital allowances are an uncontroversial tax relief that has existed in one form or another since the 19th century. They effectively convert capital expenditure (ie, longerterm investment expenditure normally recorded on the balance sheet of a business) into tax-deductible trading expenses for income or corporation tax purposes. Put another way, they are a Treasury-funded discount on the cost of property. They are a tax adjustment only and have no impact on the taxpayer’s financial accounts or the market value of the property, and making a claim cannot increase any taxable gain on a later sale.

Problems on property acquisition

Two problems arise on the acquisition of a second-hand property. Firstly, only some of the expenditure will qualify for capital allowances (most commonly the element relating to ‘plant’, including fittings and furnishings, sanitary appliances, hot water and heating installations, ventilation and air conditioning installations, some electrical installations, lifts etc.) Section 562 of the Capital Allowances Act 2001 requires the cost of these assets to be determined by a ‘just and reasonable apportionment’ of the total consideration. The established methodology for this requires a tax valuation to be prepared by a qualified capital allowances specialist.


Secondly, complicated rules mean that capital allowances claims made by prior owners can reduce the amount that may be claimed by a purchaser. Because of this, capital allowances due diligence is advisable, and appropriate enquiries should be made. Standard enquiries typically contain capital allowances questions (for example, the British Property Federation endorsed CPSE.1 document question 19, which we drafted several years ago for the London Property Support Lawyers Group).

What happens in practice

In our experience, many property deals exhibit two serious flaws relating to capital allowances:



There are three main problems with this approach. Firstly, based on West Somerset Railway plc v Chivers [1995] STC (SCD 1), HM Revenue instructions to Inspectors of Taxes make clear that it is the responsibility of the purchaser to obtain and provide details of the property’s capital allowances history, otherwise no allowances should be given. Therefore, if the pre-contract enquiry responses fail to provide adequate information (and the purchaser’s solicitor fails to follow them up), the purchaser risks losing valuable tax relief.


Secondly, purchase contract allocations are simply ineffective. Following Fitton v Gilders & Heaton [1955] 36 TC 233, HM Revenue instructions are explicit that the inspector is not bound by any apportionment agreed between the parties and reflected in the purchase contract (in practice, particularly if the apportionment is not based on a third party professional valuation, but is apparently arbitrary or unreasonable).


Thirdly, contracts often contain misleading terms. For example, it is not uncommon to see an amount allocated to ‘fixtures’, then for the schedule purportedly supporting that allocation to consist partly or entirely of chattels, ie, moveable assets that are inherently not fixtures. This is important for capital allowances purposes because there are complicated special legislative provisions that only apply to fixtures.

Implications for solicitors

Following the decision in Clarke v Iliffes Booth Bennett (a firm) [2004] EWHC 1731 (a case not directly concerned with capital allowances), the risk of failing to provide capital allowances advice during transactions can potentially extend to solicitors. In that case, it was held that a solicitor has a duty to understand a contract to the extent necessary to give proper advice to the client:


“If a solicitor who holds himself or herself out as a specialist in corporate matters is involved in the drafting of an agreement for the sale and purchase of assets…and the agreement contains tax indemnities, then the solicitor cannot be heard to say that he or she is not under a duty to understand the indemnities and advise as may be necessary in the circumstances, simply because the client is sophisticated and has negotiated the indemnities.”


By extension, a solicitor should not fail to understand and explain capital allowances clauses, or for example, the impact on capital allowances of any due diligence responses received or of any apportionment of price contained in the contract.


Capital allowances rules present potential traps that can be turned into opportunities. Too often they are overlooked, when proper assessment, if necessary with the assistance of professional tax advisers, could reap tangible rewards and minimise liability risks.


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Tags for this article: capital allowances, plant and machinery, property conveyancing, property acquisitions

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