The Structures and Buildings Allowance is a new tax relief for the costs of constructing commercial buildings and structures. Commercial buildings include offices, shops and factories; commercial structures include bridges, tunnels, dams and docks. The building or structure in question can be in the UK or overseas. The allowance is given at a rate of 2% of the cost of construction. This is for each year after the building has been brought into use spread over a 50-year period. Entitlement to the allowance is lost if the building is demolished but not if it simply ceases to be in use. The relief is only for costs incurred under a contract entered into after 28 October 2018.
How do capital allowances work?
The UK tax system does not generally allow tax relief for capital assets unless the asset comes within a defined category. If the capital asset is within one of these defined categories, then the cost can qualify for a capital allowance. These allowances can be offset against business profits as well as other profits and so reduce the tax payable on these profits. By far the most important category of asset is the one for plant and machinery. Historically, there were also allowances for constructing industrial buildings and agricultural buildings. That was until 2008, when these allowances were abolished. However, capital allowances have never been available for the cost of acquiring the land element of a property. This new relief for structures and buildings is effectively something of a revival of the old allowances for industrial and agricultural buildings.
What costs get tax relief?
As with the old allowances, the relief is targeted at the cost of the construction of the building or structure.
i. the renovation of the building;
ii. the conversion of the building; and
iii. incidental repairs in the course of the renovation or conversion.
Renovation, conversion and incidental expenditure after 28 October 2018 is eligible even if the building itself was originally constructed before then.
However, the relief does not cover the costs of:
i. acquiring the land;
ii. obtaining planning permission for the building or structure; or
iii. reclaiming, remediating or landscaping the land.
Somewhat subtly, preparing the land as a site for construction can qualify for the new allowance. Unlike the old relief, it is not possible to choose between claiming the new allowance or plant and machinery allowances on the cost of plant and machinery. The new allowance is simply not available for plant and machinery.
How do you make a claim?
Before making a claim, the owner must prepare a written statement called an allowance statement.
This has to specify:
- the building or structure to which it relates;
- the date of the written contract for the construction of the building or structure (or the earliest if there is more than one);
- the amount of money spent on the construction; and
- the date when the building was first brought into use.
If the building is later sold, the entitlement to claim the allowances passes to the buyer. Crucially, the new owner must obtain a copy of the allowance statement from any person who was a previous owner.
What happens when the building/structure is sold?
If a building has not yet been used, e.g. by being fully or partly let, and is sold by a developer, the allowance is based on the amount paid for the property. But this is not the case if there has been more than one sale before the building is first used. If that happens, the allowance is based on the lower of two amounts. The first amount is the amount paid by the buyer who actually uses the building. The second amount is the amount paid by the person who originally bought the building from the developer.
If the building sold by a developer has already been used, then the claim is based on the cost of construction in the normal way.
If a building has not yet been used and is sold by a person who is not a developer, the allowance is based on the lower of the amount paid for the building and the cost of construction.
What is the market value rule?
If the amount paid for an unused building – whether from a developer or a non-developer - exceeds its market value, then that excess is not eligible for the allowance. In addition to this, there is a more general market value rule that construction costs are not eligible if they exceed what would be normal and reasonable.
How must the building/structure be used?
To claim the allowance, the building must be used for:
i. a trade or a profession,
ii. a property business being carried on commercially, or
iii. managing investments.
This use must be to more than an insignificant extent. If the building falls into disuse, the allowances can continue to be available.
There is a straightforward rule that the relief is not available if the building is being used for residential purposes by the owner. Residential use is not just use as houses or flats but also includes use for student accommodation, nursing homes and prisons. However, there is a more draconian rule that no relief can ever be available if the very first use of the building was residential. This is regardless of subsequent use.
If a building is put to multiple uses – some of which qualify and some of which do not - the cost needs to be apportioned between the different uses. The allowance is only available on the part of the cost relating to those uses that qualify.
What happens if the building/structure is leased?
The ability to claim the allowances is affected by a sale of the building because it then passes from seller to buyer. However, it is not normally affected by the granting of leases. There is an exception to this for leases of 35 years or more. If the market value of the retained interest is less than one third of the lease premium, there is change in who can claim the allowances. This is treated as effectively a sale for the purposes of the allowance and so the ability to claim the allowance passes from landlord to tenant. On the termination of the lease, it passes back to the landlord.
If you would like further information on any issue raised in this guide, please contact:
Ray Smith, Tax Partner
David Blumenthal, Tax Partner
Malcolm Frost, Senior Associate
Farhad Shahidi, Associate