When buying or selling commercial property in the UK, capital allowances can be a valuable tax relief, but only if handled correctly. One of the most critical yet often overlooked aspects of this process is the application of a Section 198 election under the Capital Allowances Act 2001.
What is a Section 198 Election?
On purchasing commercial property where the seller owned the property prior to 2008, buyers may also be able to claim capital allowances on certain integral features (e.g. lighting, electrical, cold water systems), which can often result in significant tax savings.
The election fixes:
- The seller’s disposal value (the amount they must bring into account for tax purposes), and
- The purchaser’s qualifying expenditure (the amount they can claim capital allowances on).
This election must be made jointly by both parties and submitted to HMRC in writing, typically within two years of the transaction.
Why is it Important?
Without a valid Section 198 election:
- The buyer may be unable to claim capital allowances on fixtures, even if they paid for them as part of the purchase.
- The seller may face uncertainty or disputes over the disposal value of fixtures.
- HMRC may apply default rules that are less favourable to either party.
In short, failing to make or properly execute a Section 198 election can result in lost tax relief and unnecessary complexity.
Common Pitfalls
Some common traps when dealing with s198 elections include:
- Omitting the election entirely, especially in transactions where fixtures are not separately identified.
- Incorrectly valuing fixtures, either exceeding the seller’s original claim or misallocating the sale price.
- Missing the deadline, which is strictly enforced by HMRC unless a tribunal is involved.
- Non-taxable entities, s198 elections are still important when dealing with non-taxable entities such as charities.
It’s also worth noting that the amount apportioned to fixtures cannot exceed the amount the seller originally claimed allowances on, nor the actual sale price of the fixture.
How BHP Can Help
At BHP, we regularly advise clients on the tax implications of commercial property transactions. Our team ensures that Section 198 elections are:
- Drafted accurately and in compliance with HMRC guidance,
- Submitted within the required timeframe, and
- Strategically structured to maximise capital allowances for buyers.
Other Areas to Consider
On purchasing commercial property, buyers may be able to claim capital allowances on pre-2008 integral features (e.g. electrical, heating systems) where the seller owned the property prior to 2008 which can often result in significant tax savings.
VAT and SDLT considerations should also be prioritised when dealing with commercial property. Areas such as Options To Tax (OTT) and Transfer Of Going Concern (TOGC) rules can make a significant difference when it comes to VAT liabilities.
Whilst SDLT is payable on commercial property and is payable at tiered rates up to 5%, reliefs may apply for group transactions or qualifying entities. Linked transactions can also have an impact on the overall SDLT liability.
Final Thoughts
If you’re considering the sale or acquisition of commercial property, don’t let capital allowances slip through the cracks. A well-prepared Section 198 election can unlock significant tax savings and avoid future disputes.
Get in touch with your BHP contact today to ensure your transaction is structured for success.
