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Charities: tax considerations in buying and selling buildings

Charities can improve the tax value of buildings they sell, and should then be able to negotiate a better price.

Anne Wilson, Director, Tax
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Charities are not usually liable to tax, and therefore capital allowances do not normally apply. But when a charity buys or sells a building, the other party's tax position is important. If they have kept a record of capital expenditure, including a value of the fixtures, the charity can then improve the tax value of the building and should be able to negotiate a better price.

What are considered as fixtures?

A fixture is an asset that is fixed to a building and as a matter of property law becomes part of that building. Some items such as windows, doors, fixed partitions and tiling are treated as part of the fabric of the building and do not qualify for allowances. Other items, however, such as kitchen units, sanitary ware, lifts, heating and cold water systems count as fixtures (plant and machinery) and the purchaser is entitled to claim capital allowances on the cost.

Why is this important?

The UK tax system does not provide allowances for the cost of the fabric of buildings, but a purchaser is entitled to claim capital allowances on the costs of certain `fixtures included in the buildings (if used in a taxable trade or business). 

Charities themselves are not usually liable to tax, and therefore capital allowances are of little use to them, but when a charity buys or sells a building, the other party’s tax position is important. By maintaining records of capital expenditure on the buildings, or by fixing a value for the fixtures in the building, a charity can help the other party to enhance the tax value of the building and should therefore be able to negotiate a better price.

Can’t a trading subsidiary claim capital allowances?

A trading subsidiary might be able to claim allowances against the profits from its trade, but only if it had an interest in the land on which the building is located when it incurred the costs itself. In practice, disallowable depreciation in the subsidiary’s tax computations will usually be higher than the claimable allowances, which means that its taxable profits will be higher than its accounting profits. This will cause problems for the annual Gift Aid payment. We advise that the charity should normally own any buildings and associated fixtures and charge rent to the subsidiary.

What happens on a property sale?

Since April 2014, new rules apply and a new owner can only make a claim for capital allowances on a second-hand fixture, if the Seller had been capable of claiming capital allowances. The detailed requirements include: 

  • the asset must have previously been included in a capital allowances claim (the pooling requirement)
  • fixtures that are eligible for capital allowances are identified and the seller and purchaser agree via a joint S.198 election, what element of the purchase consider is allocated to these fixtures.

Where the parties do not agree, the value being determined by the First Tier Tribunal.

Where a S198 claim cannot be met, for instance if the seller is a charity and therefore cannot make a claim, a written statement by the seller that the requirement cannot be met and a statement from the last owner who did claim capital allowances of the disposal value.

It is important for a charity buying a building to ascertain the disposal value brought into the tax computations of the seller, so that these can be passed on to a future buyer if necessary. It can be seen that this is not necessarily straightforward and it would be very easy for these details to be overlooked on a purchase or lost.

What are integral features?

Integral features include electrical and hot and cold water systems, air conditioning and lifts.

Which integral features qualify for claiming capital allowances?

Since 2008 a business that is spending money on integral features can claim allowances at a special lower rate (originally 10%, now 8%). If a purchaser is buying a building which includes these items which were installed before 2008, and the seller has not been able to claim allowances on them, the purchaser can claim allowances on the amount of the purchase price that relates to these fixtures. 

What should my charity consider when buying a building?

It is important to remember that the seller will want to make an election under S198 to allocate a proportion of the purchase price to fixtures. They will typically want to keep the value of fixtures as low as possible in order to maximise its claims for allowances.

As your charity will in most cases neither need nor want to the allowances, there is no reason for them to resist this. However, as the allowances are of monetary value to the seller, you should not merely accede to a low value without considering whether this can be reflected in a lower purchase price for the building.

What if the seller doesn’t move on price?

You should consider whether, on a future sale, a higher value for the fixtures might be attractive to a future

What impact would allowances have on a future sale?

Even though your charity can’t claim allowances on fixtures included in the building, you may need to pass on information about claims made by a previous owner to a subsequent purchaser. If your charity is not asked to enter into a S.198 election by the seller, you should try to obtain a written statement from the seller that they not capable of claiming capital allowances. Please note that if the seller simply did not claim capital allowances, for example, if they were loss making they are still classed a capable of claiming and a S.198 election would still be required. If no confirmation or election is obtained there is a risk that if it ever comes to sell the building the future purchaser will not be able to claim allowances, due to lack of information, and may seek to take this into account when agreeing a price for the building.

Do we need to keep a record of any new fixtures installed?

Charities should bear in mind a possible future sale when installing fixtures in a building. This means that you should keep detailed records of the work done, and the costs that can be allocated to fixtures. It is much easier to document dates and costs contemporaneously, than say 20 years later when the property comes to be sold.

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