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covid-19: changing commercial properties for good?

Author: ICAEW

Published: 06 Aug 2021

Sponsored by CATAX logo

In 2020, most business leaders were left with the unenviable decision to send home their workforce with no return date in sight. 18 months on, this has presented various challenges for commercial landlords that are seeking the best return on investment for their properties, leading many to convert their commercial units to higher yielding residential ones.

However, it is important that all landlords investigate unclaimed Capital Allowances before any changes are made to their property to avoid missing out on significant amounts of money. So, how can accountants best advise their clients on this specialist form of tax relief - and help identify any unclaimed allowances - before it’s too late?

A case study

Picture a commercial landlord – they own an office block and have done since 2006 when they purchased it for £2m. The building’s six floors are rented out to three companies and have a combined income of £600,000 per year.

Following the challenges presented by the pandemic, each tenant is looking to either terminate or reduce their lease payments. This results in the landlord seeking to change the building from “commercial” to “residential split”.

Fast forward a few years and the landlord is making more money from the building than ever before, as three floors are commercial, and the remaining floors have been converted to luxury apartments. The rental income has now risen to £800,000 and the landlord has moved the building into a LTD company entity after consulting with their accountant.

The missed opportunity

Having heard about Capital Allowances through a specialist, the client investigates whether their commercial property would be eligible. An exercise is carried out on the building, and the landlord is disappointed to learn that 50% of the building has now been erased for good in terms of relief from Capital Allowances.

This is because residential use, even if rent is received, is limited to plant and machinery located in communal areas such as stairwells/landings only – not the dwellings themselves. The bottom three floors which are still offices are OK as there is qualifying activity occurring within them, but it’s still a big chunk of relief lost.

Using the numbers in the scenario above, here is how COVID-19 could catch out the landlords in the future;

Pre COVID-19:

  • 100% of the £2,000,000 building was commercial
  • Capital Allowances exercise identified 20% of the purchase price in qualifying plant and machinery
  • Allowances identified £400,000
  • Property owned via a partnership @ 40% therefore, total relief available via allowances = £160,000

Post-COVID-19:

  • 50% of the £2,000,000 building is now commercial
  • Only £10,000 of qualifying expenditure identified in communal areas
  • Capital Allowances identified remain at 20% in parts of the building still used for commercial use
  • Allowances identified £210,000
  • Property now owned in a LTD entity @20%; therefore, total tax relief available via allowances = £42,000

Your role as the accountant

It is always recommended that Capital Allowances are reviewed prior to amending a building’s use, and prior to changing the ownership entity.

As a duty of care to your clients and a legal requirement, it is important that any unclaimed allowances are assessed. Increasingly, legal action is being brought against complacent advisors in cases where relief has been lost.

But it’s not all doom and gloom - by proactively assessing your clients’ portfolios, you are adding value to both your client and your relationship with them.

Dedicated support for accountants and their clients

At Catax, we understand that the information around tax relief, including Capital Allowances, can sometimes be overwhelming. That's why we created our dedicated Partner Programme for accountants! 

As a trusted partner of the ICAEW, we will work with you to help identify and consult on your clients’ Capital Allowances position. Together, we can build a bespoke approach to suit your needs, whether it’s the occasional consultation or a complete business service outsource. Our experts work in collaboration with you and your team, and we operate within clear boundaries to ensure a win-win-win relationship.