Section 198 of Capital Allowances Act 2001

Section 198 of the Capital Allowances Act 2001 has a major significance for property transactions. If the seller of the property has claimed capital allowances on any fixtures of the building, the tax relief enjoyed as a result might have to be paid back if the seller does not elect to file an Election Notice under the above section. The Election Notice will specify the items of plant and machinery and the value at which these items are being transferred.

Now, if the value at which the items are transferred is less than the tax written down value, the seller can claim a balancing allowance. On the other hand, if the value is more than the written down value, the seller will be liable to pay back the tax relief enjoyed on the excess claims. The buyer will be entitled to claim capital allowances on the value agreed upon in the Election Notice.

Where no such value is indicated in the contract or Election Notice under section 198 (which can be made within two years of the purchase transaction) the buyer can apportion the value on a just and fair basis and claim capital allowance on eligible items. The seller might be at risk in such a case. It is thus always best to agree upon the value of plant and machinery forming part of the building at the time of sale.

The value so agreed upon is negotiable between the buyer and seller and they can select a value that provides the greatest amount of tax relief. If the buyer pays a higher rate of tax, the seller can indicate the original value of the plant and machinery as the sale value now. The seller will then pay back the full tax relief he enjoyed through capital allowance claims. However, the buyer might agree to share with the seller the extra tax relief the former can get.

The property sale transaction thus provides opportunities for tax planning and the amounts involved can run into tens of thousands of pounds in large value transactions. Ignoring this opportunity would not make good business sense.

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