Understanding Capital Allowances in Commercial Real Estate: An Essential Guide

At QuoinStone, we work alongside a specialist partner to provide our clients with the very best Capital Allowances advice. This article shares some of their expertise, delving into various capital allowance opportunities within commercial real estate, including development and refurbishments, property acquisitions, and more, providing a comprehensive overview of how these allowances can be leveraged to optimise financial outcomes.

Capital Allowances typically improve yields on purchases by between 0.20% and 1.00%. On developments and refurbishments they can reduce the net cost of projects by up to 25%.

Despite the clear benefits, Capital Allowances are still not being maximised by commercial property investors due to non-specialist advisors preparing claims, or due to them being overlooked completely (from an incorrect perception that there are no capital allowances available to them).

Following recent changes in the capital allowances legislation there have never been so many capital allowances tax reliefs available to property owners and occupiers (this excludes private dwelling units).

Let’s take a look in more detail…

Capital Allowances on Development & Refurbishments

Typically, 99% of commercial property developments and refurbishments now attract some form of tax relief. The most advantageous being full expensing, which provides a full 100% tax relief in the year of expenditure.

For UK and overseas companies, this represents a 25% net reduction in cost on all qualifying items. For individuals and partnerships the benefit is a 45% net reduction.

The legislation has never been more complex so receiving the correct advice is essential in maximising the tax savings, improving cash flow and ensuring any claim is fully compliant.

The skill is identifying as much expenditure as possible to the allowances that provide the most accelerated and immediate saving.

Capital Allowances on Property Acquisitions

Capital allowances on commercial property acquisitions can lead to significant tax savings. For example, purchasing an office building for ￡2 million could yield ￡400,000 in qualifying assets like HVAC systems, resulting in ￡100,000 in tax savings (at a 25% tax rate).

Significant allowances are missed as it is often incorrectly perceived there is nothing to claim. The legal entitlement to claim position for the purchaser is different to that of the seller.

To maximise these claims, it is essential to conduct a thorough capital allowances assessment at the time of acquisition, ensuring that all qualifying assets are identified and appropriately valued. Legal entitlement checks and advice on contract wording are at no cost through our specialist partner.

Capital Allowances Portfolio Service

For property owners and investors with extensive portfolios, a capital allowances portfolio service is invaluable. Portfolio services are particularly beneficial for family offices, large investors, property funds, and corporations managing diverse property assets.

A portfolio review for capital allowances would initially identify possible claims include allowances for plant and machinery (e.g., HVAC systems, lifts, and lighting), integral features (such as plumbing, electrical installations, and security systems), and specific trade-related items including walls and floors.

Historic Capital Allowances Reviews

There is no time restriction to review historic expenditure, as long as the fixtures are still owned. It is not uncommon to review expenditure from 20-30 years ago which has never had a capital allowances claim submitted.

It is not necessary to have full cost information to support a submission to HMRC; our specialist partner can build up costs from first principle where necessary. Once identified, these allowances can be claimed in the current tax return and in prior years tax returns that remain open, providing immediate tax relief by reducing taxable income.

Conclusion

Capital allowances in commercial real estate offer numerous opportunities for tax savings across various sectors and circumstances. By understanding and utilising these allowances effectively, property owners, investors, and businesses can significantly enhance their financial outcomes.

For more information on potential savings, please visit: https://quoinstone.consulting/other-services/capital-allowances/