Firm foundations for a new tax relief

Question.

Can you explain to me the new capital allowances relief announced in Budget 2018?

Answer.

One of the few surprises in Budget 2018 was the introduction with immediate effect of a new class of capital allowances – Structure and Buildings Allowances (SBAs). In outline, SBAs will provide relief on a straight-line basis for qualifying expenditure on new non-residential structures and buildings incurred on or after 29 October 2018. This is good news for businesses, as such expenditure has often not qualified for relief since the abolition of Industrial Buildings Allowances (IBAs) in 2011.

SBAs are available for the direct costs of constructing new commercial structures and buildings (including any necessary demolition or land alteration), new conversions or renovations, and the acquisition of an unused asset from a developer.

There are a number of key exclusions to be aware of. In particular, SBAs are not available for:

• Land and land-related costs (e.g. stamp duty, planning permission).
• Shared areas in mixed commercial / domestic buildings (SBAs differ from normal capital allowances in their treatment of communal areas).
• Work spaces in domestic settings (e.g. a home office).
• Structures or buildings where the claimant does not have an interest in the land on which they are constructed.

Where there is mixed qualifying / non-qualifying use of a building (e.g. a mixture of commercial and residential accommodation) expenditure will need to be apportioned. However, there will be no SBAs at all where ten percent or less of the overall construction costs would qualify.

The buildings and structures can be in the UK or overseas, provided that they are used for the purposes of a business within the charge to UK tax.

Relief is given for both income tax and corporation tax purposes at a flat rate of two percent per annum of the original construction expenditure, meaning that full relief will be available over a 50-year period. There are no balancing charges or adjustments where an SBA asset is disposed of – instead, the purchaser continues to claim two percent per annum of the original cost of the asset over the remaining portion of the 50-year period.

There is therefore no ‘step up’ in value for SBA purposes for the purchaser if an asset is sold for a profit. Some extra complexities will also be introduced into asset sales, for example:

• Sellers will need to deduct the amount of SBAs claimed from the base cost of the asset when calculating their chargeable gain or loss.
• Purchasers will need to establish what level of SBAs have been claimed and over what period to establish the remaining relief available to them.

Another important point to note is that, unlike regular capital allowances, there is no opportunity to disclaim SBAs and carry them forward – if you don’t claim them you lose them.
SBA expenditure is not eligible for the annual investment allowance (AIA), although expenditure on integral features and fixtures can continue to qualify for normal capital allowances, including the AIA. SBAs can only be claimed once the structure or building comes into business use (provided no more than seven years has elapsed since the expenditure was incurred). Any expenditure undertaken after that time may qualify for SBAs in its own right, but as a separate allowance over fifty years – there is no pooling of expenditure on an asset.

Whilst we await further details on the new rules in early 2019, it is worth highlighting that the Budget may have brought businesses an early Christmas present – albeit they will need to wait 50 years to get the full benefit of it.

The advice above is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.