Charities 

What are fixtures?

A fixture is an asset that is fixed to a building and as a matter of property law becomes part of that building.

There are two main classifications of fixtures, falling into two pools: main pool and special rate pool for integral features.

Integral features are longer life plant and machinery and include electrical and hot and cold-water systems, air conditioning and lifts. The main pool includes all other plant and machinery, falling outside integral features.

Some items such as windows, doors, fixed partitions, and tiling are treated as part of the fabric of the building and may be eligible for structures and buildings allowances.

A potential purchaser may be entitled to claim capital allowances on fixtures as an apportionment of the purchase price.

Why is this important?

The UK tax system provides allowances for the cost of the fabric of buildings (structures and buildings allowances) for qualifying expenditure incurred on or after 29 October 2018. In addition, a purchaser may also be 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 not usually claimed, but the other party may be able to use them. By maintaining records of capital expenditure on the buildings, or by fixing a value for the fixtures in a building that it is purchasing, a charity can help the other party to enhance the tax value of the building and may therefore be able to negotiate a better price.

Can a trading subsidiary claim capital allowances?

A trading subsidiary might be able to claim allowances against the profits from its trade, but only when it has an interest in the land on which the building is located when it incurred the costs.

In practice, disallowable depreciation in the subsidiary’s tax computations will usually be higher than the claimable allowances, meaning that its taxable profits will be higher than accounting profits. This may cause reserve issues when considering the Gift Aid donation to the charity.  We recommend that the charity itself own any buildings and associated fixtures, charging rent to the subsidiary.

What happens on a property sale?

Since April 2014, a new owner can only make a claim for capital allowances on second-hand fixtures 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 S198 election, what element of the purchase consideration is allocated to these fixtures.

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

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

It is therefore important for a charity buying a building to ascertain the disposal value brought into the tax computations of the seller so that these allowances can be passed on to a future purchaser if necessary. This may not be straightforward, and could be easy for these details to be lost or overlooked on a purchase.

How can capital allowances be utilised?

A business that is spending money on integral features can claim allowances at a special, lower rate of 6% writing down allowance against taxable profits. The main pool is higher, at 18%.

If a purchaser is buying a building including integral features installed before 2008 that the seller has not been able to claim allowances on, the purchaser can claim allowances on the amount of the purchase price that relates to these fixtures.

What should a charity consider when buying a building?

It is important to remember that the seller will usually want to make an election under S198 to allocate a proportion of the purchase price to fixtures. If a seller has pooled and utilised capital allowances, they should insist on an election to set their disposal value.

A seller will typically want to keep the value of fixtures as low as possible to maximise its claims for allowances.

As a charity will, in most cases, neither need nor want to claim the allowances, there is no reason to resist this. However, as the allowances are of monetary value to the seller, it is worth considering whether this can be reflected in a lower purchase price for the building.

What if the seller does not move on the price?

A consideration should be made as to whether, on a future sale, a higher value for the fixtures might be attractive to a future purchaser.

What impact would allowances have on a future sale?

Even though a charity cannot claim allowances on fixtures included in the building, information about claims made by a previous owner may need to be passed to a subsequent purchaser. If a charity is not asked to enter into an S198 election by the seller, an attempt to obtain a written statement from the seller that they are not capable of claiming capital allowances should be made.

Please note that if the seller simply did not claim capital allowances, for example, if they were loss-making, the seller is still classed as capable of claiming, and an S198 election would be required. If no confirmation or election is obtained, there is a risk that if they ever come 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.

Should a record be kept of any new fixtures installed?

Charities should bear in mind a possible future sale when installing fixtures in a building. This means that detailed records of work done, and costs incurred, should be kept.

For advice on the capital allowance position on potential purchases and sales, please contact Jon Daley or your usual Crowe contact.