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Accounting depreciation charged on buildings, plant and machinery, furniture, office equipment and motor vehicles is not deductible for tax purposes. The law however provides for corresponding deductions on expenditure incurred on certain assets used for the purpose of the business in the form of industrial building allowance, capital allowances, accelerated capital allowance and agriculture allowance.
Industrial building allowance (IBA)
- Qualifying expenditure (QE)
QE for purposes of IBA is the cost of construction of buildings or structures which are used as industrial buildings or certain special buildings. In the case of a purchased building, the QE is the purchase price.
- Buildings that qualify for IBA
An industrial building or a special building includes a building used as / for:
- a factory
- a dock, wharf, jetty
- working a farm, mine
- a hotel registered with the Ministry of Tourism*
- supplying water or electricity, or telecommunication facilities
- approved research*
- a private hospital, maternity home and nursing home which is licensed under the law*
- an old folks’ care centre approved by the Social Welfare Department
- childcare centre provided by an employer*
- a school or an educational institution approved by the Minister of Education / Higher Education / other relevant authority*
- industrial, technical or vocational training approved by the Minister of Finance (MoF)*
- motor racing circuit approved by the MoF*
- service project in relation to transportation, communications, utilities or any other sub-sector approved by the MoF*
- living accommodation for individual employed by manufacturing, hotel or tourism business or an approved service project*
- For items marked (*), where not more than one-tenth of the floor area of the whole building is used for letting of property, the whole building qualifies as an industrial building. Where more than one-tenth of the floor area of the whole building is used for letting of property, only the remaining part of the building which is not used for the purpose of letting of property qualifies as an industrial building.
- The MoF may prescribe a building used for the purpose of a person’s business as an industrial building.
- General rates of allowance for industrial building, whether constructed or purchased:
- Initial allowance (IA): 10%
- Annual allowance (AA): 3%
- cost of assets used in a business, such as plant and machinery, office equipment, furniture and fittings, motor vehicles, etc. “Plant” is defined to mean an apparatus used by a person for carrying on his business but does not include a building or any asset used and that functions as a place within which a business is carried on. W.e.f YA 2023, the MoF may prescribe any asset to be excluded from the definition of plant.
- the cost of construction and installation of plant and machinery (subject to payment of withholding tax where the installation is carried out by a non-resident)
- expenditure on fish ponds, animal pens, chicken houses, cages and other structures used for agricultural or pastoral pursuits
- where an asset is acquired on a hire purchase term, the QE for a particular basis period is based on the amount of capital repayment made during that basis period
- General rates of capital allowance
** w.e.f YA 2024
* QE for non-commercial vehicle is restricted to the maximum amount below:
- Expenditure on an asset with a lifespan of not more than 2 years is allowed on a replacement basis.
Accelerated capital allowances
Examples of assets which qualify for accelerated capital allowance rates:
Small-value assets not exceeding RM2,000 each are eligible for 100% capital allowances. The total capital allowances of such assets are capped at RM20,000 except for Small & Medium Enterprises (as defined).
Automation capital allowances for the manufacturing sector
Income tax exemption equivalent to the above ACA, to be set-off against 70% of statutory income, is given. Therefore, the total allowances would amount to 200% of the capital expenditure.
The above is enhanced as follows:
i. Scope of automation to include the adaptation of Industry 4.0 elements; ii. Scope of tax incentive is expanded to include agriculture sector; and iii. Capital expenditure threshold for high labour intensive industries, other industries and agriculture be aligned and increased up to RM10 million
(Applications received from 1 January 2023 to 31 December 2027)
The scope is further expanded to include the commodity sector under the Ministry of Plantation and Commodities. (Applications received from 14 October 2023 until 31 December 2027)
Balancing adjustments (allowance / charge) will arise on the disposal of assets on which capital allowances have been claimed. Generally, the balancing adjustment is the difference between the tax written down value and the disposal proceeds. The balancing charge is restricted to the amount of allowances previously claimed.
Capital allowances which have been previously granted shall be clawed back if the asset is sold within 2 years from the date of purchase, except by reason of death of the owner or other reasons the Director General of Inland Revenue thinks appropriate.
No balancing adjustments will be made where assets are transferred between persons / companies under common control. In such cases, the actual consideration for the transfer of the asset is disregarded and the disposer / acquirer is deemed to have disposed of / acquired the asset at the tax written down value.
Where an asset is temporarily disused for business purposes, it is still entitled for capital allowances provided the asset was in use immediately prior to the disuse and during the period of disuse it is constantly maintained in readiness to be brought back into use for business purposes.
If the disuse ceases to be regarded as temporary, the asset will be deemed to have ceased to be used and any allowances granted during the period of temporary disuse will be clawed back.
Assets held for sale (AHFS)
If an asset is classified as AHFS in accordance with generally accepted accounting principles during the basis period, such asset is deemed to have been disposed of.
Special treatment has been prescribed which may vary the disposal date and / or disposal value of such assets from the normal rules.
Unabsorbed capital allowances
Any unabsorbed capital allowances can be carried forward indefinitely to be utilised against income from the same business source. For a dormant company, the unutilised capital allowances will be disregarded if there is a substantial change in shareholders.
General enquiries, PwC Malaysia
Tel: +60 (3) 2173 1188
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11 common questions about capital allowances and assets
You're likely to buy equipment to use in your business that’ll be useful for more than about a year.
If you’re a freelance web designer, that’d be your computer, desk and chair. If you’re a dressmaker, it’d be your sewing machine. This equipment is sometimes called ' fixed assets ', or, as we call it in FreeAgent, ' capital assets '.
1. Why 'capital assets'?
Because, when you spend money on these assets , HMRC calls that 'capital expenditure', as distinct from the day-to-day running costs of your business which are called 'revenue expenditure'.
2. Why do I have to separate these out?
They're treated differently from day-to-day running costs, both for tax purposes and in your accounts. More about that in a moment.
3. Is there a lower cost limit for when an item becomes a capital asset?
HMRC hasn't set one. If you have an accountant, he/she might have a set limit.
But usually it'll depend on your business's size. For example, a £25 phone would almost always go into Internet and Telephone as a day-to-day running cost. A £250 phone system would be a capital item for a small business, but probably a day-to-day running cost for a larger one.
4. How are capital assets treated in my accounts?
Because the asset's going to be useful to your business long-term, it goes on to your business's balance sheet .
But every year, the business will use some of the asset's value up, and if you try and sell the used asset, you won't get as much for it as you paid for it when it was new.
To allow for the using-up of the asset's value, a bit of it has to be deducted from your business's profit each year.
This is called ' depreciation ', and in FreeAgent it's worked out for you automatically.
5. That's accounts, what about tax?
HMRC says that depreciation isn't an allowable expense for tax, so you have to add it back when you're working out the profit that your business will pay tax on.
6. So don't I get any tax relief for buying assets?
Yes you do. It's just handled differently.
HMRC calls it ' capital allowances ' - a tax allowance for your capital expenditure.
7. What are capital allowances, and how do I claim them?
Let's start by looking at new assets your business buys.
There is an Annual Investment Allowance (AIA) available, which is set at £1 million.
8. How does that work?
Your business can spend up to the current limit a year on most new assets and then deduct the cost of the assets from its profit before working out tax on the profit.
9. When you say 'most new assets', which ones can't I claim AIA on?
Here are the main exceptions as outlined by HMRC:
- Assets your business buys in the last accounting period before it stops trading
- Assets you've introduced into the business from another business - for example, if you traded as a sole trader and bought a computer through your sole trade, then incorporated your business as a limited company and transfer the computer into the company, you can't claim AIA on the computer at the point it transfers to the company, because you'd have already claimed capital allowances on the computer when you bought it for your sole trade
- Personal assets you've introduced into the business, such as an office chair you already owned when you started your business
- Assets that are given to your business. No cost = no allowance!
10. Are there any other allowances available for new assets?
Yes. Certain assets attract a 100% first year allowance (which means you can deduct the full cost of the asset from your business's profit before working out its tax due), no matter how much they've cost.
Assets that qualify for this are mainly those that help the environment, such as energy-saving equipment or environmentally beneficial equipment.
11. What about assets I already owned - do I get any relief on those?
Before the AIA was introduced, assets would be divided up into 'pools' and then, on the balance of each pool, a Writing Down Allowance (WDA) would be given.
That's now 18% or 6% depending on the assets.
So if you have old assets in a pool brought forward, and the pool at the start of your accounting year came to £2,000, and these assets are subject to the normal rate of 18%, then the amount you could take off your business's profits as WDA on those assets would be £360.
HMRC gives additional advice about capital allowances for companies and other businesses .
Capital allowances are a very complex area and unless your business has only one or two assets, it’s well worth getting some help from your accountant. You can also use FreeAgent to automatically calculate your capital assets by following the steps in this guide .
Disclaimer: The content included in this guide is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this guide. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.
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Capital allowances explained
What are capital allowances and who can claim them?
- KPMG in Ireland ›
- Insights ›
What is tax depreciation/capital allowances?
Capital allowances are akin to a tax deductible expense and are available in respect of qualifying capital expenditure incurred on the provision of certain assets in use for the purposes of a trade or rental business. They effectively allow a taxpayer to write off the cost of an asset over a period of time. Ken Hardy and Damien Flanagan of our Capital Allowances team explain.
Benefits of claiming
- Claim an immediate tax / cash benefit
- Reduce or completely shelter a tax liability
- No restriction on high earners claiming wear and tear allowances and most industrial buildings allowances
- Improve cash flow and keep cash in your business!
- Possible cash refund / repayment of taxes
- Not a “specified relief”
Who can claim?
- If you built or bought a property or incurred capital expenditure on plant and machinery that is in use for the purpose of a trade or rental business, you can probably claim.
- KPMG’s Tax Depreciation Group will carry out an initial assessment of your capital expenditure – at no cost – to determine if there is an opportunity for us to add value.
- Our experience has shown that capital allowances /tax depreciation claims are often understated. This results in taxpayers leaving behind valuable tax/cash savings. We can help rectify the situation and identify your full entitlement.
- The area of capital allowances is quite complex. Entitlement must be established and qualifying expenditure must be properly identified. There is no approved list of qualifying items of plant and machinery!
- Whether an item qualifies for capital allowances must be determined by reference to the facts. It is necessary to satisfy a number of conditions established primarily through case law and Revenue precedence.
- Revenue frequently audit capital allowances/tax depreciation claims. It is important to ensure your claim is fully compliant and there is sufficient evidence/documentation available to support your claim.
- Wear and tear allowances and most industrial buildings allowances have not been affected by the recent withdrawal of property-related tax schemes.
- KPMG’s Tax Depreciation Group is the only Big 4 firm in Ireland to have a dedicated specialist capital allowances team – with over 17 years experience.
- Our dedicated team consists of full-time chartered quantity surveyors and tax professionals, who work solely on preparing maximised and compliant tax depreciation/capital allowances claims for our clients.
Tax depreciation/capital allowances claims
We have extensive experience of preparing the following claims:
- Wear and tear allowances claims for qualifying plant and machinery (“P&M”) – claimed at 12.5% over 8 years
- Plant and machinery analysis for R&D tax credit claims
- Industrial buildings allowances claims – typically claimed at 4% over 25 years
- Energy efficient capital allowances claims – 100% claim in year 1
- Look back claims – potential repayment of tax
- Negotiating claims with Revenue.
Examples of claims/property types:
The purchase of new or secondhand properties.
The fit-out / repair / refurbishment / extension of properties including the following:
- Retail and shopping centres
- Factory and manufacturing plants
- Leasehold improvements
- Mixed use developments
- Nursing homes
- Rental properties – apartments and houses
- Landlord works
- Tenant works
KPMG in Ireland
Email [email protected]
Email [email protected]
Working with you to prepare robust & compliant tax depreciation/capital allowances
Capital allowances for nursing homes are akin to a tax-deductible expense (PDF, 493KB)
Your entitlement to claim has not been established properly; this is a complex tax technical area
- Insufficient supporting documentation in place to justify your claim
- Over-claim: Incorrect inclusion and / or treatment of certain types of expenditure
- Under-claim: exclusion of qualifying expenditure – cash burn!
Implications of incorrect claim
- Under-claiming: You may not have claimed the full amount of allowances / tax savings that you are entitled to
- Over-claiming: If your claim is audited by Revenue, you may be leaving yourself open to repayment of the underpaid taxes relating to over-claimed allowances, in addition to interest, penalties and, in extreme cases, publication on the list of tax defaulters.
Frequently asked questions
- Is there a list of qualifying plant and machinery that I can use to calculate my claim? No, there is no approved list. This is a common misconception. There is no legislative definition of the term “plant and machinery” (“P&M”), so the identification of qualifying items is not straightforward.
- How is P&M identified? P&M must be identified on a first principles basis. Whether an item qualifies must be determined by reference to the facts, the nature of the trade, and the function of the item in the trade. A number of conditions/tests must be satisfied.
- Do all fixed asset additions qualify for capital allowances? No, all capital expenditure does not qualify for capital allowances.
- What does entitlement mean? A taxpayer must satisfy the relevant criteria in the legislation in order to be eligible to make a claim. We will establish that the taxpayer has an entitlement to claim and once this is confirmed,we will prepare a maximised capital allowances claim.
- Can landlords claim capital allowances? Generally yes, where the property is let. It is, however, critical to establish entitlement, especially in a landlord / lessee situation.
- Can property developers claim capital allowances? Yes, when they put the property or P&M in use for the purposes of a trade or rental business.
- I bought/built/refurbished a property a number of years ago, but I have not claimed capital allowances (or may have under-claimed). Can I claim the allowances now? Depending on the facts and circumstances, you may be able to go back four years to amend your tax return to include the allowances that you should have claimed.
- I don’t have any information relating to the expenditure incurred. Can I still make a claim? We can assist by way of generating a breakdown of the expenditure once there is evidence to prove that the expenditure was in fact incurred.
- What happens to the allowances that I don’t use? Depending on facts and circumstances, unused wear and tear allowances and industrial buildings allowances can be carried forward indefinitely and used to shelter future liabilities, i.e. they will not be lost.
Making a claim – our methodology
Our team will undertake the following actions to prepare your claim:
- We will determine whether an entitlement to claim exists. This may involve a review of a purchase contract or development agreement and supporting documentation and lease agreement, as necessary.
- We will liaise with the project design team, estate agents or clients’ finance team to obtain the necessary cost information and finance information required.
- Where there is no cost information available, our in-house quantity surveyors will prepare an estimate of the likely apportionment of expenditure incurred.
- We will carry out a site visit, if required.
- We will carry out a detailed analysis of the total capital expenditure incurred to identify the maximum amount of qualifying expenditure.
- We will prepare a detailed, stand alone report to support the claim.
- We will negotiate the claim with Revenue, where required.
Our claims are prepared in line with Revenue practice, precedents and the principles established from case law and we would be confident, as a result of our extensive Revenue experience, that the positions adopted in our analysis would stand up to Revenue scrutiny.
Due to the volume of claims we have prepared, our clients can be confident that our experience allows us to identify fully maximised and compliant capital allowances/tax depreciation claims. Our team has extensive practical experience in the following areas:
- Offices and commercial buildings
- Retail, hotels, restaurants and leisure
- Infrastructure, manufacturing and process plants
- Private finance initiatives
- Purchase appointment – new or second hand property.
Since our foundation, we have built a bespoke claim methodology that has been tried and tested under a significant number of Revenue audits. Our credentials and experience of negotiating and delivering claims are second to none.
Wear and tear allowances claims for plant and machinery
Client: A private hospital group. Project: A major expansion project. Claim: We identified c. €19m of qualifying expenditure. Benefit: The client received a tax benefit of c. €2.5m.
Client: An Irish clothing retailer. Project: Store upgrades / fit-outs. Claim: We assisted the client with a claim of c. €18m. Benefit: The client received a tax benefit of c. €2.2m.
Client: An Irish logistics service providers. Project: Depot refurbishments and upgrades. Claim: We identified c. €6m of qualifying expenditure. Benefit: The client received a tax benefit of c. €800k.
Client: A landlord Project: Office fit-out / refurbishment including a new extensions. Claim: We assisted the client with a claim of c. €1.8m. Benefit: The client received a tax benefit of c. €460k.
Industrial buildings allowances (IBAs) claims for qualifying construction expenditure:
Client: An Irish manufacturing company. Project: A new production plant. Claim: We assisted the client with claims for wear and tear allowances of c. €6m and IBAs of c. €4.5m. Benefit: The client received a total tax benefit of c. €1.3m.
Client: A US multinational in the medical devices industry. Project: An existing production facility and extension. Claim: We assisted the client with a successful reclassification of IBAs to plant and machinery. Benefit: The client will receive a time value saving of €1m, and a refund of c. €500k from Revenue.
Get in touch with KPMG’s Tax Depreciation group
KPMG’s Tax Depreciation Group is recognised as Ireland’s primary capital allowances specialists. We are the only Big 4 firm in Ireland to have a dedicated capital allowances team.
- The combination of expertise in construction, property, surveying, tax and accounting is a unique offering in Ireland and our extensive experience helps ensure our clients’ claims are maximised and robust.
- For almost 15 years we have successfully prepared, negotiated and settled claims for all types of property investments for a wide cross-section of clients – from individuals and small companies to large multinationals.
- We understand that your time is a scarce resource. We aim to reduce the workload of our clients by providing a tailored and streamlined process proven to allow you to claim the maximum benefit with minimal disruption to your day-to-day activities. We seek to ensure that the interaction with the relevant personnel is kept to a minimum but appropriate level.
Contact Ken Hardy or Damien Flanagan of our Capital Allowances team if you think you may be in a position to benefit from tax depreciation/capital allowances. We would be delighted to discuss your particular circumstances or carry out an initial assessment of your capital expenditure to see if there is a potential opportunity for us to assist – this is, of course, offered to you at no cost. Alternatively, you can e-mail us via [email protected] .
We will endeavour to respond to your initial query within two working days.
What are capital allowances and who can claim them? (PDF, 395KB)
Capital allowances for business properties
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Ray Chidell and Jake Iles : what all tax practitioners need to know
Whilst capital allowances in general are familiar to nearly all accountants dealing with business tax computations, allowances for fixtures in commercial property have increasingly become a specialised topic. Important changes came into effect in 2008, 2012 and again in 2014, and as the rules become ever more complex, it is not feasible for every business tax adviser to have a safe grasp of all of the specialist issues.
Help is available in various guises, but there are certain key aspects that all accountants and tax advisers need to understand if they have clients who own (or are thinking of buying) commercial properties of any kind. In this article, the authors summarise the essential principles that all such practitioners should understand to protect their clients’ interests.
The starting point is simply to appreciate the fact that capital allowances for commercial properties are potentially very valuable. There are many variables here, but tax relief may typically be available for between 15% and 45% of the cost of a property. A simple warehouse will be at the lower end, whereas a care home or upmarket hotel may be around the top of that range.
For a company paying corporation tax at 19%, therefore, a £1 million property might yield potential tax savings of between £28,500 (£1 million x 15% x 19%) and £85,500 (£1 million x 45% x 19%). For individuals paying income tax at 45%, the potential savings could be as much as £200,000. There will be exceptions outside both ends of that spectrum of savings.
These are significant sums for any client, so the clear duty of the tax adviser is to ensure that the tax relief is not lost through negligence or an incomplete understanding of the relevant statutory rules.
The value of the allowances comes from fixtures in the property.
The key point here is to recognise that the term “fixture” has a technical meaning for capital allowances purposes (CAA 2001, s. 173). Crucially, the meaning is different from the concept of “fixtures and fittings” as used for accounting purposes.
The technical capital allowances definition is that a fixture is “plant or machinery that is so installed or otherwise fixed in or to a building ... as to become, in law, part of that building ...”.
So the term “plant or machinery” includes tables and chairs and computers and cars and much more besides, but none of these items are fixtures. The latter term only encompasses plant or machinery that is fixed to the property in some way, such as toilets, lifts and general lighting.
This distinction has all sorts of practical implications. The key one, however, is to recognise that capital allowances claims cannot simply be based on the figures in the accounts for “fixtures and fittings”.
Suppose, for example, that a care home has an extension. The costs of the beds and tables will be categorised in the accounts as “fixtures and fittings” but the toilets, lifts and lights will all be included as “additions to property” or under some such heading. If the capital allowances claim only picks up the items categorised as fixtures and fittings, the claim will be far smaller than it should be.
Sale and purchase agreement
The same principle applies when a property is bought. The sale and purchase agreement may distinguish between various categories, for example £800,000 to property, £200,000 to goodwill and £30,000 to fixtures and fittings. The buyer will no doubt hope to claim plant and machinery allowances for the £30,000 cost of the fixtures and fittings. That is fine as far as it goes but must not be the end of the story! The main capital allowances claim will lie within the £800,000: not all of this amount will qualify, but a substantial percentage will do so. (As discussed below, however, particular steps will be needed to ensure that these more valuable allowances can be claimed.)
Time limits work differently for capital allowances.
If a property was bought (say) 15 years ago, and allowances were not claimed at the time, it is not possible to go back now and re-open the computations for the year in question. What is possible, however, is to bring any qualifying expenditure into account in the current year (or into any year that is still open under normal self-assessment principles).
This principle is subject to various caveats, however.
First, a condition of doing this is that the person must still own the items in question at some time in the chargeable period for which the claim is first made (see section 58(4) CAA 2001). So no claim can be made for a period after that in which the property is sold.
Care must also be taken if a property is refurbished. Suppose, for example, that a property bought in 2003 included a boiler that was replaced in 2010. No claim may now be made for the original boiler, so that tax relief has been permanently lost. It will be necessary to check whether the cost of the new boiler was capitalised (in which case allowances may now be claimed) or was written off as revenue expenditure (in which case, of course, no claim may be made).
Another restriction is that no claim for either annual investment allowances (AIAs) or first-year allowances (FYAs) will be possible for delayed claims, i.e. where the expenditure is first brought into the capital allowances computations in a later year than that in which it was actually incurred. This is because of restrictions imposed by s. 51A(2) CAA 2001 (for AIAs) and s. 52(2) CAA 2001 (for FYAs). The claim will therefore be for writing-down allowances only.
Capital gains tax
The fact of claiming allowances for fixtures in a property does not mean that a higher capital gain will arise on sale (TCGA 1992, s. 41). So, if a property is bought for £600,000 and sold for £800,000, the gain will (in simple terms) be £200,000, whether or not allowances are claimed, and whether or not the value of those allowances is retained at the point of sale. (The position is more complex if the property is sold at a capital loss.)
Changing rules – 2008
2008 saw several important changes to the rules for claiming plant and machinery allowances, some of which continue to raise important practical issues today.
The introduction of AIAs meant that most businesses can claim accelerated allowances for most types of qualifying expenditure. The annual limit for such AIAs is now set at £200,000, after some eye-wateringly complex transitional rules in past years. AIAs are subject to various restrictions (e.g. they are not given for cars), and the £200,000 must be shared between various entities as specified in the legislation (e.g. group companies).
The concept of “integral features” was also introduced from 2008. This broadened the range of assets qualifying for capital allowances. In particular, it meant that cold water systems, general lighting and general electrical wiring all started to qualify for capital allowances on pretty much a routine basis. This cut-off date (expenditure incurred from 1 or 6 April 2008 for corporation tax and income tax respectively) remains significant today, as the buyer of a commercial property needs to know whether or not the vendor has been able to claim allowances for any given fixture. If the person who is today selling an office block bought it in 2007, the current buyer can be reasonably certain that the outgoing owner was not able to claim for the general lighting and wiring costs, for example. This can have a big impact on the claim that may be made today.
Changing rules – 2012 and 2014
Finance Act 2012 (FA 2012) introduced some important new legislation, now at s. 187A and 187B of CAA 2001. These changes – applying from April 2012, but to some extent deferred to April 2014 – again have critical implications for the buyer of a property.
In brief, a buyer normally has to jump through two hoops before claiming capital allowances for fixtures in the property. As these hoops necessarily involve action by the vendor, it is vital to consider them before the sale and purchase agreement is signed off.
The first of these is the so-called “pooling requirement” (s. 187A(4) CAA 2001). Essentially, this says that the vendor has to pass the value of the fixtures in the property through his (or her or its) capital allowances computations before transferring any such value to the buyer. This is best illustrated with an example:
Jack bought a restaurant in 2010 for £450,000 and is selling the property to Jill in 2018 for £480,000. The business has not been a success, so Jack generated no taxable profits and has not worried about capital allowances.
A review makes it clear that Jack could have claimed £160,000 for fixtures in the property. Although he does not need the allowances, Jack must add the full £160,000 to his capital allowances computations, and must then agree a transfer to Jill, if Jill is to have any chance of claiming the valuable tax relief.
If Jill only becomes aware of this after the purchase agreement has been signed, Jack will have no interest in cooperating and may refuse to pool the qualifying expenditure. Jill will then have no legal hold over Jack, so will miss out on the tax relief.
Fixed Value requirement
The second requirement introduced by FA 2012 (the “fixed value requirement” at s. 187A(5) CAA 2001) is that the parties must sign a fixtures election (under s. 198 or sometimes s. 199 of CAA 2001) to determine a value at which the fixtures will pass for capital allowances purposes from one party to the other. More on this below, but in the example just given the parties may therefore agree to transfer the fixtures at £160,000, the maximum amount allowed.
As a further complication, the FA 2012 rules are not imposed for fixtures for which the vendor was unable to claim (e.g. general lighting costs incurred before April 2008). The buyer can nevertheless claim for these, over and above any figures in the fixtures elections.
The FA 2012 rules also contain a trap for the unwary vendor. This is a seemingly innocuous comment at s. 187B(6) CAA 2001, which says that the pooling and fixed value requirements do not have any bearing on the vendor’s disposal value. What this means in practice is that we can very easily end up with the position where any capital allowances formerly given to the vendor are clawed back at the time of the sale, even as allowances are denied to the buyer.
Romeo ran a restaurant, and is selling it to Juliet. The facts are as for Jack and Jill above but in this case Romeo has had a profitable business and has claimed full relief (by way of annual investment allowances) for the qualifying expenditure of £160,000.
If no fixtures election is signed, or if the election proves to be invalid for any reason, Juliet will be unable to claim for the cost of the fixtures. Nevertheless, Romeo will face a balancing charge of up to the full amount of £160,000 – a disastrous outcome for both parties! With a valid election, one of the parties would have enjoyed the full amount of tax relief or (more probably) they would have agreed to share it in some way.
The fixtures election
Care is needed to get the s. 198 (or s. 199) election right, to avoid the scenario in the second example above, and detailed conditions for the election are given at s. 201 CAA 2001. A common error is to forget that the election can only cover fixtures in the sense described above. If the election purports to include tables and chairs, for example, it may well be invalid, with dire consequences as just illustrated.
The election determines an amount that will be treated for capital allowances purposes only as the transfer value of the fixtures to which it relates. There are two important points here. First, this does not (in itself) affect the commercial apportionment between the “fixtures and fittings” and the property. Second, the figure in the election does not have to be in any sense “reasonable”; within certain parameters, the parties can negotiate the figure as they wish, and it will be binding on HMRC. Understanding what negotiations are possible is critical to defending the interests of the client, whether buying or selling.
Commercial property standard enquiries (CPSEs)
The solicitors acting for the buyer will normally raise CPSEs, the last section of which is concerned with capital allowances. Most solicitors, however, will make it clear in their engagement terms that they do not wish to be responsible for capital allowances matters, so the buck may well stop with the accountant or tax adviser.
The CPSEs are problematic in various ways, not least because they include an ambiguous question about former claims by the vendor. Furthermore, the CPSE replies rarely provide sufficient information to determine the best way forward, and often need to be challenged. Given the amounts at stake (even, and indeed especially, if the CPSE replies purport to say that no or few allowances are due) it may well be worth getting specialists involved in reviewing the replies received from the vendor’s side (and indeed in formulating the replies if acting for the vendor).
In some circumstances, it will be essential to have a valuation of the property and of the fixtures it contains. This is not something that most accountants are professionally qualified to do, so specialist valuers will need to be engaged as appropriate.
A valuation will generally be necessary, for example, if the vendor owned the property before 2008 and/or if the vendor has not yet made a full capital allowances claim.
This article only scratches the surface of the practicalities of claiming capital allowances for fixtures, and there are many potential complications.
The capital allowances history of previous owners is one key factor that may determine whether or not a claim is possible (s. 185 and s. 562(3) CAA 2001). This may involve digging up Land Registry records and/or Companies House accounts, and understanding the implications of both.
Different issues also arise, for example, where leases are granted (s. 183, 184 CAA 2001), where there are connected parties (s. 214 CAA 2001) or where the property is a dwelling-house, albeit perhaps with communal elements for which a claim may be possible (s. 35 CAA 2001).
Dealing with capital allowances without a detailed understanding of the underlying complexities is, of course, unlikely to lead to the best outcome for the client. But ignoring the potential claim (a much more common scenario in practice) is equally unacceptable for the client and risky for the adviser. The professional adviser who does not want to grapple with all the technicalities should, at the least, become familiar with the risks and opportunities, so that specialist support can be used where necessary.
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The content shown on this page is a Note for Guidance produced by the Irish Revenue Commissioners. To view the section of legislation to which the Note for Guidance applies, click the link below:
- Return to Section 631
631 Transfer of assets generally
This section provides relief where a company transfers a trading operation carried on in the State to another company in return for securities in the second company. Such a transaction does not give rise to a corporation tax charge or, where appropriate, a capital gains tax charge, or to a balancing allowance or balancing charge in relation to capital allowances on any of the assets transferred.
The company which takes over the trading operation is regarded as having acquired the assets at their original cost to the transferring company and as having received any allowances that the transferring company received.
In order to ensure that the provisions are only applied to genuine transactions, the section provides that where the shares acquired in consideration for the trading operation are sold within 6 years, the cost of those shares for capital gains tax purposes is to be taken as the original cost of the assets transferred.
(1)(a) The measures apply where a company transfers the whole of a trade carried on by it in the State to another company in return for the issue to the company of shares in that other company. In order to obtain relief both companies must be from the EU and the trade must be carried on within the State. In addition, the assets must be taken into use for trade purposes by the receiving company.
While the Directive obliges the reliefs to be given in the case of transactions which involve companies from two Member States, the reliefs are extended to transactions involving two companies from the EU. This means that transactions between two Irish companies are covered by the measure.
- An Irish company transfers its trade to a French company in return for securities in the French Company and the French company carries on the trade in the State through a branch or agency.
- A French company which carries on a trade in the State through a branch or agency transfers the trade to an Italian company in return for securities in that Italian company and the Italian company carries on that trade in the State through a branch or agency.
- An Irish company transfers its trade to another Irish company in return for shares in that other Irish company and the other Irish company carries on the trade.
The reliefs also apply where a company transfers a part of its trade.
The rules to be applied for capital allowances purposes are —
- (2)(a) the disposal of the assets in the course of the transfer does not give rise to a balancing allowance or balancing charge, and
- (2)(b) the company receiving the assets gets the allowances which the receiving company would have got if it had continued to carry on the trade and use the assets for the trade. When the receiving company eventually sells the asset, it is to be subject to a balancing charge or allowance that would have arisen if all allowances made to the transferring company and all things done to or by that company relating to the asset had been made to or done to or by the receiving company.
(2)(c) Priority is given to section 400 where both this section and section 400 apply to a transaction. Section 400 applies to provide similar relief where a trade carried on by a company within the charge to Irish corporation tax becomes carried on by another company within that charge, provided that the trade (or a 75 per cent interest in it) is owned by the same persons before and after the transaction. If both sections apply to a transaction, section 400 applies to it and this section does not.
(3) Special capital gains tax rules are applied to a transfer. The transactions would, under normal capital gains tax rules, give rise to a charge to tax on the disposal of the assets. As provided for in the Directive that gain is not to be charged but the asset is taken over by the receiving company at its original cost to the transferring company. The specific rules are —
- the transfer is not to be treated as a disposal for capital gains tax purposes, and
- the receiving company is to be treated as having acquired the assets at the time and for the consideration at which they were acquired by the transferring company and as if all things done to or by the transferring company relating to the assets had been done to or by it. This means that the receiving company is taxed on the full gain on the asset by taking into account the original cost of the assets to the transferring company. Any capital allowances made, including capital allowances made to the transferring company, are taken into account in calculating a gain or loss.
(4)(a) Where the securities in the receiving company given to the transferring company in consideration for the transfer of the assets are sold by the transferring company within a period of 6 years after the transfer, the gain on disposal of the securities, referred to as “new assets”, is effectively calculated by comparing the disposal proceeds with the original cost of the transferred assets. This is achieved by apportioning to the securities in the receiving company the non-taxable gain arising to the transferring company.
The amount allowable on disposal of the shares, being the market value of the assets transferred, is to be reduced by the amount apportioned. If the securities are of different types the apportionment is to be carried out on the basis of the value of the different types at the time they were acquired by the transferring company.
(4)(b) If the shares are not disposed of until after the end of the 6 year period, the cost of the shares is taken to be the market value of the assets given on the transfer.
The reliefs are not to apply in certain circumstances. These are where immediately after the time of the transfer —
- (5)(a)(i) the assets are not used by the receiving company for the purpose of a trade carried on by it in the State,
- (5)(a)(ii) the receiving company would not be chargeable to tax on a disposal by it of the assets concerned. (The reason for this provision is that if Ireland’s taxing right in respect of a gain on disposal of the assets is lost, then a gain should be taxed at the time of transfer. The purpose of the Directive was to postpone a gain while at the same time protecting the taxing rights of Member States),
- (5)(a)(iii) the receiving company would not be liable to tax in respect of gains on assets, such as aircraft and shipping which are accorded special treatment under double taxation treaties (under double taxation treaties, a provision similar to that in the OECD Model Agreement is normally provided). The article concerned provides that profits from the operation of ships or aircraft in international traffic are to be taxed in the State in which the place of effective management is situated,
- (5)(b) where the receiving company and the transferring company jointly elect that the reliefs are not to apply (the election must be in writing and should be made to the inspector at the time at which the transferring company’s return is required to be made for the accounting period in which the transfer takes place).
Relevant Date: Finance Act 2021
Use "" to search for specific phrases.
60-180 Assets disposed of on a transfer of trade
A special rule applies for capital allowances where a company disposes of assets on the transfer of its trade or part of its trade to another company, where not less than 75% of both companies are beneficially owned by the same person. In this case, all assets upon which capital allowances have been claimed are deemed to be transferred at their tax written-down values at the date of transfer ( CTA 2010, s. 948 ). Any actual disposal proceeds are ignored. For computational rules where transfer of plant or machinery occurs during a CTAP see ¶61-100 .
The transferee company effectively ‘steps into the shoes’ of the transferor and continues to claim the relevant capital allowances in the normal way. This provision will generally apply to the transfer of trade between group companies.
See ¶90-580 for further explanation of these provisions and the carry-over of trading losses.
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Transferring property from a sole trader to a limited company
Cameron Fleming | 19 May 2023 | 9 months ago 0 0 0
Why do you need to transfer property from a sole trader to a limited company?
Better credibility, limiting your personal liability, what is an asset, goodwill as an asset.
- If your business has been closely linked to a property. An example of this scenario would be that of a hotel, a frail care home, or playschool/kindergarten. In this instance, the goodwill may be considered part of the building as you might not be able to sell the business without the building. The goodwill, therefore, cannot be separated from the property.
- If your business has been intricately linked to the expertise of an individual. An example of this scenario would be that of a personal service company, an actor/musician, a hairdresser, or a makeup artist business. The goodwill will most likely be attached to the specific person rather than the business.
Disposal of an asset
- Under TCGA 1992, s162 – you might have heard this being referred to as incorporation relief. It is activated when the act of a transfer of any business occurs. It does, however, require the transfer of the WHOLE business (excluding some debts by concession); or
- Under TCGA 1992, s165 – you might have heard this being referred to as a holdover relief where there is a trading business.
Transferring land & property assets
- There will be a disposal with a market value transaction for CGT purposes:
- Stamp Duty Land tax (SDLT) purposes will be calculated on the market value transaction.
Investment land & property assets that are not a trade property
- It is likely that an additional 3% rate will apply to the transaction;
- Multiple properties may attract Multiple Dwellings Relief;
- 6 or more properties will require you to choose one to apply the non-residential rates to; and
- If these are market-term leased properties with unconnected third party tenants, or the property is less than £500k in value, then the 15% super rate for corporate acquisitions is not applicable.
- If the property is less than £500k in value or if the property is let to an unconnected third party (on market terms), then the Annual Tax on Enveloped Dwellings (ATED) should not apply either.
Transferring plant & machinery assets
Stock & work in progress assets
- The agreed price
Debtors & creditors as assets
Cash in the bank as an asset, vat issues relating to the transfer of a business.
- The assets, such as stock-in-trade, machinery, goodwill, premises, and fixtures and fittings, must be sold as part of the TOGC.
- The buyer must intend to use the assets in carrying on the same kind of business as the seller – this does not need to be identical to that of the seller, but the buyer must be in possession of a business rather than simply a set of assets.
- Where a seller is a taxable person, the buyer must be a taxable person already or become one as the result of the transfer.
- In respect of land or buildings which would be standard-rated if it were supplied, the buyer must notify HMRC that they have opted to tax the land by the relevant date, and must notify the seller that their option has not been disapplied by the same date.
- Where only part of the business is sold it must be capable of operating separately.
- There must not be a series of immediately consecutive transfers of the business.
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Transfer of a trade
What are the succession to trade rules.
It is often necessary to transfer a trade between companies under common ownership without a change in ownership before or after a company sale or acquisition, or as part of a general group restructuring operation.
The succession to trade rules enable trades to be transferred under common 75% ownership with the ability to carry forward tax losses into the successor company and a tax-neutral transfer for capital allowances purposes. The transfer of a trade between group members is commonly also referred to as a ‘hive down’, ‘hive up’ or ‘hive across’, depending upon the group structure in question. Without rules to the contrary, the trade would be treated as permanently ceased in the transferor company, resulting in losses being lost and balancing adjustments in the capital allowances pools. The succession to trade rules only apply to transfers between companies and not to an individual or partnership comprised of individuals.
The losses transferred to the successor company
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- Web page updated on 25 Apr 2023 12:43
Home / Tolley Tax Guidance / Corporation Tax / Selling or exiting the business
Exemption ― burial and cremation.
Exemption ― burial and cremationThis guidance note provides an overview of the VAT treatment of services that are provided in connection with the burial or cremation of human remains.VAT treatmentThe following services are exempt from VAT:•the disposal of the remains of the dead•making arrangements
Holdover relief for disposals by trustees
Holdover relief for disposals by trusteesOverviewWhere a capital gain has been realised on an asset that has been disposed of and that disposal was not for full value (that is not in an arm’s length sale) then holdover relief may be available. This will happen when trustees appoint capital assets
Parking provision and expenses
Parking provision and expensesCar parking facilities at or near to the employee’s workplaceThere is an exemption from tax and NIC where an employer provides parking, or pays for or reimburses an employee for the costs associated with car parking at or near the place of work; there are no reporting
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Transfer of asset between connected companies
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Substantial shareholder exemption
Profits on cessation of trade, gains and losses on assets, trading loss relief, change in nature and conduct, restriction on capital loss, corporate capital loss restriction, trading loss restriction, tax relief on purchase, rollover relief, vat and stamp duty considerations, assumption of liabilities, double tax charge where sold as assets, business assets disposal relief where sold as shares, non-tax considerations, summary comparison of share purchase and trade purchase.
In some cases, there will be no corporation tax arising on gains from the sale of shares owned by a company group.
The substantial shareholder exemption was introduced by the Finance Act 2001 to improve the attraction of doing business in the UK. The intention was to remove a tax barrier from the transfer of business activities and thereby allow an organisation to focus on core areas.
The exemption applies to gains on disposal of shares provided conditions are met which are:
The transferor company must hold at least 10% of the company being sold. Broadly, substantial means holding 10% of the ordinary shares and 10% of distributable profits
The ownership of at least 10% must have been held for a period of at least twelve months at some time in the six years prior to disposal. This means, for instance, that if a disposal occurs on 30 November 2020, the amount owned at that date need not be as much as 10%, provided at least 10% has been held since 1 December 2014.
Prior to 1 April 2017, it was a requirement for the transferor company, and company invested in, to be trading, both before and after the transfer. This meant that the transferor company had to carry on in business. This would be impractical where a holding company sells its only subsidiary. However, this is no longer a requirement. The trading requirement only applies where the sale is made to a person who is connected with the transferor.
Where a business is acquired as a trade, the substantial shareholder exemption would not be available.
It could be possible to consider company reorganisations prior to sale to facilitate a disposal of part of the business in the future. This could be achieved for instance by hive down or demerger.
Consider that the gain on disposal recognised by the transferor, while not giving rise to corporation tax will increase the distributable reserves of the transferor. If the transferor company is subsequently sold or liquidated, business assets disposal relief could be available. An increase in distributable reserves could create a personal tax liability for the owners, for instance in the form of dividends payable. In the owner managed business sector, sale of a company by a group might not provide a tax benefit over sale of company owned by the shareholder of the group.
The substantial shareholder exemption also prevents an allowable loss arising. This could occur where the company invested in was acquired by the transferor rather than started up within the transferor group.
The Substantial shareholder exemption is automatic and does not require an election to be made.
When shares in a company are transferred, the trade does not stop, it is only the ownership that changes hands. By contrast, on transfer of the business only, a trade ceases and this gives rise to tax implications which are set out in the table below:
Where the assets is transferred between two companies that are connected, an election has to be made within two years of the date of transfer to treat the asset as being transferred for tax written down value.
From 1 April 2017, it is possible to include brought forward losses in a terminal loss relief claim.
A company can own property, often the commercial premises from which it operates.
A group of companies arises where several companies come under common ownership. This could occur where a target company is made a subsidiary of a group following acquisition. Losses arising after 1 April 2017 cannot be set against profits of group companies for the first five years following an acquisiton. To the extent that group profits exceed £5 million, only 50% of the loss can be relieved intra-group.
A trading loss will not be available to the new owners following a change in ownership if there is a significant change in the nature or conduct of the trade. The change cannot occur within 5 years of the transfer. Prior to 1 April 2017 the limit was 3 years. A change started gradually before the 5-year period transfer could also result in denial of relief. Examples of significant change include not just business activity but also customer or geographic markets.
Loss relief would also be denied where the business activity has become negligible but is revived by the new owners.
Within a group of company, one company can surrender its trading losses to another. While there is no method for relieving capital losses, a group of companies can transfer assets for such amount as give rise to neither gain or a loss for tax purposes.
An anti-avoidance provision exists to prevent “loss buying.” Without the restriction, a company with unrealised gains could acquire another company with capital losses, transfer the asset with the pregnant gain into the newly acquired company and use losses brought forward to reduce taxable gains.
Similarly, a company with an unrealised capital gains could seek a purchaser with brought forward or unrealised losses. This practice is known as “gain buying.” Both loss and gain buying are prevented by TCGA92/Sch 7A and TCGA92/Sch 7AA.
Capital losses of a target company before it became part of a group are referred to as ‘pre-entry’ losses. A ‘pre-entry’ loss includes capital losses brought forward by the target company and unrealised losses on assets owned by the target company before it became part of a group. Broadly, a pre-entry loss can only be set against a pre-entry gains, i.e. a gain made by that subsidiary before it became part of the group. The loss will not be available to reduce capital gains on assets which are part of its new group.
Announced in the 2018 Budget , from 1 April 2020, a restriction on the amount of losses that can be deducted from gains applies to companies with capital gains of over £5 million. Broadly, the capital gains that can be relieved is the sum of 50% of the capital gains plus £5 million. This loss restriction is not directly related to purchase of shares by a company.
From 1 April 2017, there is a restriction on the carry forward of losses of over £5 million.
For the purposes of rollover relief, a group of companies are treated as one company. Gains on business assets in one company can be rolled over to the extent that a business asset is purchased by another company in the same group.
If a business is sold separately from its company, the seller would be subject to a double tax charge. First corporation tax profits arise on the disposal of the trade, i.e. in the form of goodwill. Second the proceeds of the sale need to extracted from the company. A dividend withdrawal could expose the owner or owners to considerable income tax. If the company ceases to be trading following disposal of its business, capital gains tax relief could still apply. Business asset disposal relief still applies provided shares are sold within three years of the company ceasing to trade. Extraction of proceeds as capital gain on liquidation of the company would likely result in lower tax for the shareholders of the disposing business, however there would still be a two-tiered taxation. (For instance, 19% plus 81% of 10% or 27.1%.)
Where a proprietor disposes of the shares of a business, he or she would be subject to capital gains tax. However, it is likely that business assets disposal relief would apply and therefore that the gain would be subject to tax at just 10%.
The employment obligations of the vendor transfer to those of the acquirer following a share transfer. This requirement is covered by the Transfer of Undertakings (Protection of Employment) Regulations 2006, is known as TUPE for short.
A trade sale tends to progress faster as there is less due diligence.
A buyer can negotiate on more favourable terms in a trade sale.
A share sale would likely result in higher legal fees associated with the writing up of tax covenants.
Share sales allow the business to carry on without changing its name and could therefore be more discrete.
Key benefits for purchaser of asset purchase
- Tax relief can be obtained on goodwill. This is at a fixed rate of 6.5% per annum.
- Capital allowances can be obtained on plant and machinery
- Higher base cost for any land or buildings
- Lower due diligence cost as not assuming liabilities of company
- No stamp duty payable on the shares.
Key benefits for vendor of a share sale
- Business asset disposal relief available on sale of business
- Double tax charge avoided, so proceeds not subject to income tax on dividends.
- No balancing charge on disposal of equipment, buildings and stock. A realisation of gains in one year could cause a spike in the year of disposal where gains are all realised at once. This increases potential liability to income tax.
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Capital Allowances Manual
Ca15100 - general: successions: general.
When a person (the successor) succeeds to a trade, property business, profession or vocation that has been carried on by another person (the predecessor), the successor may take over the business assets without having bought those assets. The treatment of assets that have qualified for capital allowances other than PMA and RDA normally follows the treatment of the business profits. There is a broadly similar rule for plant and machinery CA29030 .
If the succession is treated as a cessation/commencement of the trade etc., capital allowances are calculated as if the predecessor had sold the assets taken over by the successor to the successor at market value. The successor cannot claim initial allowance. If market value has to be determined for the purposes of the successions legislation the Commissioners determine it in the same way as an apportionment that affects the liability of two or more taxpayers CA12500 .
If the trade is treated as continuing when the succession takes place, capital allowances are calculated as if the successor had carried on the trade and owned the assets from the outset.
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