Budget 2018 Capital Allowances: the changes you need to know about

Budget 2018 – Capital Allowances

From a capital allowances perspective there were a number of significant changes in this year’s budget.  Most surprisingly, the chancellor unexpectedly announced a large rise in the Annual Investment Allowance (AIA) and an entirely new category of capital allowances – Structures & Buildings Allowance (SBA) – as he sought to stimulate capital investment in the UK in face of Brexit.

Structures & Building Allowances

This a new allowance for capital expenditure on buildings. Previously this expenditure would not have attracted any tax relief. This is not a reintroduction of Industrial Buildings Allowances that were phased out 10 years ago, this relief will function differently.

The key points are:

• Applies to new expenditure from 29 October 2018;
• Relief given over 50 years – 2% of qualifying expenditure per annum, straight line basis;
• Where properties are sold, unused SBA transferred at tax written down value – no balancing adjustment;
• Expenditure on land excluded;
• Subsequent modifications to buildings in later years creates a new 50 year life pool;
• Leaseholders can get the relief; unused allowances revert with reversionary interest at the end of the lease;
• Fully commercial buildings only – SBA not available on buildings that are mixed use with dwelling. Specifically excludes student accommodation but does include hotels & care homes, there will be further consultation on the definition of dwelling;
• Claimed SBA will reduce the property base cost for capital gains purposes, unlike plant and machinery allowances that do not.

Annual Investment Allowance

The Annual Investment Allowances (AIA) was temporarily increased from £200,000 to £1 million from the 1 January 2019 for 2 years. The AIA allows for qualifying plant and machinery allowances to be written down in the year of expenditure rather than over time, up to the limit.   

This is a substantial boost for taxpayers.  Clients who are about to purchase expensive equipment or are part way through a development project should, where possible, look to defer payment until after the 1 January to maximise the use of the AIA.

Other Changes

• Special Rate Writing Down Allowance - The annual writing down allowances for the special rate pool is reduced from 8% to 6%;
• Enhanced Capital Allowances (ECA) removed – ECA on water and energy saving equipment will be phased out from April 2020;
• Enhanced Capital Allowances for Electric Car Charing Points Remain - The 100% first year deduction for the installation of electric car charging points will remain. This allowance was due to expire but will be extended until April 2023;
• Clarification of allowances for the alteration of land

The increase in the AIA to £1m will be welcomed by small and medium sized businesses, many of whom will now be able to relieve all of their qualifying expenditure in the first year.

These business, especially those who are occupiers, will also welcome the introduction of the SBA even though in cash terms the relief, at 2% per annum, is relatively low.

For larger investors, the SBA is only a timing advantage, given that any relief obtained will be lost through the erosion of the base cost for capital gain purposes. Consequently, many may not bother recording their initial constructions costs which may lead to difficulties for subsequent transfers.

As with all new all new reliefs, the devil will be in the detail, we will need to see the proposed legislation to see how some of the finer points play out.

This new relief has been paid for by reducing the special rate allowances form 8% to 6%.  In practice it will now take nearly 50 years to write down the special rate pool so it would not be surprising if the special rate pool is merged with the new SBA in the future.

The removal of ECAs for energy and water saving equipment is unfortunate. Given that this relief does not cost the exchequer much, it is surprising that the government are removing it. We anticipate that as the carrot is withdrawn, the stick will be introduced.

The review of the relief for alteration of land is almost certainly in response to HMRC substantially losing the SSE Generation tax tribunal case where the taxpayer successfully claimed the boring of tunnels, and other land alterations, for use in a hydro-electric power station. The government is seeking to restrict the scope of the relief.

Elsewhere, the government has restated its intention to reduce corporation tax to 17%, it has confirmed the transfer of non-resident corporate landlords from income tax to corporation tax in April 2020 and will seek to restrict the use of brought forward capital losses in the same way as it has already restricted the use of brought forward income losses.

The above complexities highlight the importance of receiving high quality professional advice at the right time. Contact Knight Frank’s specialist capital allowances team to further understand how these changes will affect your existing property investments and future developments and acquisitions.