Section 198 Election Capital Allowances

Section 198 Election Capital Allowances – Fixtures apportionments and elections

Section 198 Election Capital Allowances – The legislation for apportionments is in CAA2001 sections 562

Section 198 Election Capital Allowances – Background

Where an interest in land (freehold, leasehold etc) that includes a fixture is sold, the buyer normally has to apportion the sale price to determine the part of the sale price that relates to the fixture.   This is what PTC do all the time.

The apportionment is made by calculating what the building and the fixtures would cost to replace at the date of the purchase, deducting the underlying value of the land (you cannot claim on land)  and putting the costs through a formula that calculates the value of the fixtures within the sale price paid.

The formula is

Q             =          P    x           A

                                         A + B + C

Where,          Q = Qualifying Expenditure,  P = Purchase Price,  A = Estimate of Plant & Machinery cost,     B = Estimate of Building cost and

C = Value of Land

Section 198 Election Capital Allowances – There is also another way to agree an apportionment and this is by making an election in accordance with CAA2001 sections 198 – 200.  This is commonly called a section 198 election.

Section 198 Election Capital Allowances – Election to fix apportionment – s198 elections

Section 198 Election Capital Allowances – A disposal event (the sale of a property for example as discussed in the last section) may give rise to a clawback of allowances.  To avoid this the seller can enter into a section 198 election jointly with the purchaser to fix the value of the plant and machinery fixtures within the sale price at a value equal to or less than the amount claimed by the seller.

Section 198 Election Capital Allowances – You can only make an election if a claim has been made by the seller already.  If you do, you can negotiate with the buyer to fix the amount of plant and machinery in the sale price. The mechanism for this is to agree a value between what the seller paid for the fixtures (Q in the formula we just looked at) and the sale price of the property.

Section 198 Election Capital Allowances – If no election is made the existing rules about apportionments apply, but the buyer may be restricted to the amount the seller claimed and the seller would then get a claw back by way of a balancing charge up to the limit of what he claimed.

When should you consider a s198 election?

1. Section 198 Election Capital Allowances – If you or your client is selling a property that you have claimed on.
2. Section 198 Election Capital Allowances – Before contracts are exchanged otherwise the opportunity may be lost.
3. Section 198 Election Capital Allowances – The elected value will become the value that the seller enters as his disposal value and the buyer enters as his plant and machinery value.  This can be anything between £1 (to limit the balancing charge to £1 in the pool) and the price paid.

How do you make an election?

• Section 198 Election Capital Allowances – Must be made within two years of the date of the transaction, in writing to HMRC.
• Section 198 Election Capital Allowances – Must be signed by both seller and buyer.
• Section 198 Election Capital Allowances – Must be in a format that provides information which identifies the items it covers, listed by value.
• Section 198 Election Capital Allowances – The elected value cannot be bigger than the amount originally claimed or the sale price paid.
• Section 198 Election Capital Allowances – The purchaser does not have to be a taxpayer to enter into an election, but must have a UK tax reference

A valid election can only be made when a disposal value (for a fixture) is brought into account by the seller (see CAA 2001 section 196).

Therefore the seller must have made a valid claim for capital allowances already.

If you client is:

• Section 198 Election Capital Allowances – a property trader,
• Section 198 Election Capital Allowances – a developer,
• Section 198 Election Capital Allowances – a pension fund or
• Section 198 Election Capital Allowances – a charity

they cannot claim Capital Allowances so if they are selling they cannot make a s198 election.

Section 198 Election Capital Allowances