10/9/2018 CAPITAL ALLOWANCES 9 OCTOBER 2018 CONTENTS Nolan Masters – CA Benefit, how CAs work and examples David Gibson – CA Transactions, opportunities and changes Mark Lacey – Construction Market Overview to Brexit WHAT ARE CAPITAL ALLOWANCES Government tax incentive – not a “scheme” Determined by legislation and 100 years of case law Interpreted and claimed by tax payers; not automatically given If not claimed then the tax payer misses out but can look back HMRC check claims are correct 1
10/9/2018 WHAT IS THE BENEFIT OF CLAIMING CA Deduction against corporation or income tax Creates a cash flow benefit and increases return on investment Lower tax rate environment, but increased proportion of tax to pay Only form of tax relief against property capital expenditure HOW IT WORKS Basic Without With Tax Return Capital Allowances Capital Allowances Rental Income / Profit £2,000,000 £2,000,000 Deduct Allowable Costs (£1,000,000) (£1,000,000) i.e. Debt Finance Capital Allowances No Claims (£1,000,000) Profit Subject to Tax £1,000,000 0 Tax to Pay (@ 20%) £200,000 0 CASH BENEFIT OF £1M QUALIFYING EXPENDITURE 2
10/9/2018 CASH FLOW BENEFIT OF £1M Benefit claimed over a number of years Claim the relief at different rates Can carry forward unclaimed allowances Tax Planning Need to analyse the expenditure to claim the relief at the highest writing down allowances available HOW TO UNLOCK THE BENEFIT Hold as investment Non Incur capital Tax Free Qualifying Fixtures Capital expenditure Own the relevant interest in land CLAIM OPPORTUNITY 1 - ON ACQUISITION Claim on second hand fixtures Who has entitlement, one claimant per fixture Valuation exercise of building, land and P&M Tax Planning Have two years to agree value of Capital Allowances, contract provision critical to enable purchaser to address post completion 3
10/9/2018 CLAIM OPPORTUNITY 2 - ON DEVELOPMENT Available on certain qualifying fixture Based on actual costs incurred Apportion certain allowable costs Tax Planning Accelerate basic rates of tax relief for energy efficient plant & machinery, must be certified at the time of expenditure CLAIM OPPORTUNITY 3 - ON LEASE INCENTIVES Type of lease incentive Who pays for what Structure agreement Tax Planning If contribution paid towards expenditure qualifying for capital allowances, tenant can treat as non taxable income receipt CLAIM OPPORTUNITY 4 - REFURB OF CORES Capex reviews, capital vs revenue Assist cost feasibility Recovery via the service charge Tax Planning Consider empty voids where landlord contributes to service charge pot 4
10/9/2018 CLAIM OPPORTUNITY 5 - FULL REFURBISHMENT Main structure already in place, higher qualifying % Claim incidental expenditure under s25 Capital vs revenue considerations Tax Planning Allowances available where the thermal qualities of a building are improved LAND REMEDIATION RELIEF CLAIMS Available for clearing contamination e.g. asbestos, gases, Japanese knotweed Qualifying expenditure attracts 150% tax relief UK Corporate tax payer only with available tax credit Tax Planning Available to both investors and developers HURDLES TO MAKING A DEVELOPMENT CLAIM Time restricted ? Information not available - no cost details ? Does the benefit warrant a review ? Who picks up the claim ? 5
10/9/2018 BUYING AND SELLING What do I need to do and when? What are the angles? The seller says there are no allowances to pass across? What next? ACQUISITIONS - ESTABLISH LEGAL ENTITLEMENT 1. Fulfill Fixed Value & Pooling Requirement Fixed Value Requirement Agree CA position s198 Election Tribunal Written Statement Pooling requirement Insert figures in accounts ACQUISITIONS - ESTABLISH LEGAL ENTITLEMENT 2. Has the relevant interest been acquired? Freehold / Leasehold? 3. Historic Property Ownership Prior Owner Claim History Timing of Historic Purchases and Capex 6
10/9/2018 ACQUISITIONS – BUYER TO ESTABLISH ENTITLEMENT HOT Stage Never assume no Capital Allowances available Review legal entitlement to claim on property Review CPSEs (don’t provide all the answers) Don’t be silent – ask questions Insert appropriate contract wording to facilitate future claim Post Completion Prepare claim and finalise s198 election with Vendor MISSED CLAIM OPPORTUNITIES ON ACQUISITIONS No CAs Available £2 s198 Election Not Applicable Timing of Expenditure Pre / Post April 2008 Capital Contributions Fall Outside of s198 election Non Tax Paying Tenants s181 - Claim on tenants fit out Properties Acquired Vacant / Part Vacant Potential claim on retained fixtures Unclaimed Allowances Property Fixtures v Loose Equipment CASE STUDY - OFFICE ACQUISITION Barrier: Acquired with £2 s198 Election in Place Value: £50,000,000 Client: Private Background: Acquired 2016 but assumed no CAs Never made claim… until now Seven figure Capital Allowances 7
10/9/2018 CASE STUDY - OFFICE ACQUISITION Barrier: Contract Silent and Not Aware of CAs Value: £29,000,000 Client: Overseas Investor Background: Acquired 2014 from Developer Unaware of Capital Allowances Assumed time restriction to claim £7,000,000 Capital Allowances CASE STUDY - INDUSTRIAL ACQUISITION Barrier: Vendor Believed No CAs Available and Advised ‘Not Applicable’ Value: £3,900,000 Client: UK Investor Background: Vendor acquired in 2016 with £2 election Vendor didn’t make own enquiries Claim based on Vendor purchase price £380,000 Capital Allowances CASE STUDY - SHOPPING CENTRE ACQUISITION Barrier: Acquired with £2 s198 Election in Place Value: £345,000,000 Client: UK REIT Background: Acquired 2 Assets a) Taxpayer with £2 Election b) Council who Developed 17 Capital Contributions Made by Vendor 8
10/9/2018 CASE STUDY - COMPANY ACQUISITION Barrier: CA Position Silent and No Info Provided Value: £50,000,000 Client: Overseas Investor Cash Saving: £1,500,000 MISSED CLAIM OPPORTUNITIES Not aware of claim opportunities Accountant Think it is too late / No record of costs Irrecoverable VAT Capital Failure to Claim Incidental Expenditure Client QS Allowances Not profit making but have future tax liabilities Client assumes accountant or someone addressing it Lawyer Failure to Structure Grants / Contributions Correctly CASE STUDY - DOCTORS SURGERY EXTENSION Barrier: Advised CA value too small Received Grants = 90% of Final Account NHS - £500,000 Pharmacy - £670,000 Value: £1,300,000 Final Account Client: GP Partnership Cash Saving: £205,000 9
10/9/2018 CORPORATION TAX REFORM April 2019 CGT applies to all UK asset sales including offshore companies Rebased from April 2019 April 2020 Offshore companies to be brought under UK corporation tax regime Offshore companies to have restriction on deductible interest to value of £2m across Group Corporation tax rate reduced to 17% CORPORATION TAX REFORM -WHAT DOES IT MEAN? Increased future tax liability for Offshore Companies Tax rate reduced from 20% to 17%, but CGT to be charged on future sales. Most effect in 3-4 years time Restriction on deductible interest likely to apply to most offshore property investors Capital Allowances will become more important Historically offshore companies able to mitigate tax liabilities using debt relief and CAs of little interest What Next? Plan for future tax liabilities. Claim now and build up allowances Market Overview in the run up to Brexit Veritas I RICS HQ 9 October 2018 10
10/9/2018 The macro picture |2018 Construction output In summary The UK is still (change on previous quarter) attractive to London’s commercial market has been fairly • Foreign Direct resilient with a 30% increase in London Q2 Q1 Investment transactions with new market entrants, 2018 2018 comparatively cheap assets and changing +0.90% -0.84% risk attitudes. The retail market remains GDP growth in the UK has Current construction delivery model coming • challenged slowed and is forecast to lag under increased focus and uncertain behind other developed nations • Labour constraints continue Supply has peaked, the Currency rates whilst the euro pipeline is low and tenant rate has somewhat stabilised, demand is getting stronger the dollar rate has been City vacancy West End € $ volatile. rate vacancy rate 4.7% 4.0% The macro picture |2018 Currency – a different story Materials Tariffs 2018 GBP:EUR exchange rate and volatility All materials index 1.17 average 120 1.16 1.15 115 1.14 110 1.13 1.12 105 1.11 100 1.1 1.09 March November March November March November March November March November March July July July July July 1.08 1.07 2013 2014 2015 2016 2017 2018 2018 GBP:USD exchange rate and volatility Labour 1.45 1.4 1.35 1.3 1.25 1.2 1.15 Average High Low Evidence – tracking 2017 movement 2018 year to date Concrete 5.6% 1.3% Fabricated Structural Steel 7.9% 5.0% Steel scrap 21.8% -1.8% Bar reinforcement 28.4% -1.4% Oil 16.6% 17.3% Copper 18.5% -8.1% Aluminium 19.7% 1.3% alinea materials index 3.7% 2.8% alinea commodities index 17.1% -6.5% CICJ agreement 2.75% 3.2% Steelworkers agreement 2.0% 2.5% Electricians agreement 2.0% 2.5% 11
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