The sting in the tail of the new Structures & Building Allowance (SBA)

What’s new?

On the 29 October 2018 the Chancellor announced a surprising new allowance that will apply to capital expenditure on new buildings and structures.  Draft legislation was subsequently released at the Spring Statement on the 13 March 2019.

Knight Frank was invited to meet with HMRC and HM Treasury to discuss the technical guidance note and the proposed legislation as part of the RICS consultation in January and the subsequent technical discussions at the Treasury in February.

The SBA itself will be a 2% straight line deduction of qualifying building costs so the relief will be given over a 50 year period.

It will not be possible to accelerate the SBA; it will sit outside the £1m Annual Investment Allowances (AIA) and there will be no balancing adjustments when a property is sold.

Each new owners simply picks up the allowances from the previous owner. And despite the allowances only being 2%, it does give relief where none existed before.

So what’s the problem?

Given the ongoing fiscal constraints, the introduction of this new relief has to be tax neutral, both in the short and long term. Consequently the Special Rate annual writing down allowance has been reduced from 8% to 6%.  Additionally, any SBAs claimed will clawed back where properties are sold at a gain.   All other capital allowances are an absolute benefit and do not increase taxes on capital gains.

Previously announced changes that bring overseas investors in line with domestic investors means there will be little scope for avoiding taxes on capital gains, so for investors the SBA will be a timing benefit, not an absolute benefit.

Perfect information in an imperfect world? 

HMRC has set out its expectations of the documentation required to make a claim for SBA:

• Date of earliest contract of construction
• Amount of expenditure incurred
• Date of first use

On the face of it, this information requirement does not appear onerous, however this information is expected to be maintained annually (any additions in each year added to a new SBA pool, including any tenant reverted asset) and transferred to a new owner.

In practice, many transactions will not transfer this information, especially not over a 50 year period and the benefit will be lost over time.

Conclusion

Occupiers will benefit from the introduction of this relief, but not nearly as quickly as they might have hoped.  A 50 year writing down period does not reflect current market realities where the average office tenancy is only 7 years.

Whilst we welcome the introduction of a tax relief of business expenditure on buildings and the simplification of tax in general, we feel this proposal will not lead to the stated policy aim of stimulating investment in property.

The proposals as they stand unfairly penalise investors by reducing the rate at which Special Rate Allowances are claimed to allow for the introduction of an allowance that, at best, will be a marginal timing benefit.

It is now more important than ever to ensure the correct advice is received in a timely manner. Knight Frank’s multi-qualified, specialist team can advise on all capital allowances issues arising from the acquisition, sale and construction of commercial property.

Get in touch to see how we can benefit your business.