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Capital allowances a crucial consideration for councils investing in commercial property

In 2017 alone, local authorities acquired almost £1.9bn of commercial property. It is easy for councils to dismiss tax incentives as being irrelevant on account of them not being able to claim any direct relief.

However, as the need for prudence and risk management around commercial property acquisitions adds to budgetary pressures, councils are being forced to think outside of the box. 

Capital allowances – which can be claimed when a tax payer buys an "asset" – have historically been given little or no priority in commercial property transactions. However, the Chancellor's autumn budget introduced more generous first year reliefs and a brand new Structure and Buildings Allowance (SBA) – which gives additional relief for structural elements of new builds and extensions – bringing them firmly into the spotlight and making them increasingly attractive.  

This could have considerable benefits for councils that take action now in order to realise the upside when they come to sell their commercial property later on. Say a council buys a tenanted Grade A office new for £44m and comes to sell it in ten years as part of a wider initiative. The tax saving value of a property like this could well exceed £2.5m – nearly 6% of the acquisition cost – and for new builds that qualify for the new SBA it could be £6.5m – nearly 15% of the acquisition cost. At the point of sale, the council can pass any unused allowances onto the buyer, creating significant benefit for both parties. 

There is a very big catch, however: since April 2014, it has been the responsibility of the purchaser of a property, whether tax payer or not, to secure the value of any available allowances and ensure they can be passed onto the next owner. This means that councils need to prudently plan ahead and design a governance process that not only allows for the necessary due diligence and calculations to take place, but that the tax break can be successfully obtained at the point of purchase and passed on at the point of sale to avoid a potential negative impact on valuation. 

The SBA puts a new duty of care on a non-tax payer to record construction costs of properties acquired brand new to be run down notionally so that a tax paying entity can pick them up in the future. These new allowances are taken over 50 years.

Andrew Burns, president of the Chartered Institute of Public Finance and Accountancy (CIPFA), wrote: “Providing councils are following the rules that dictate making sound and affordable investment decisions, using specialist internal and external advisers to identify and mitigate any investment risks, [commercial property] activities bring benefits for councils and taxpayers.”

With councils experiencing budget cuts of almost 50% in the last seven years and the Public Accounts Committee warning that councils could face a £5bn funding gap by 2020, now is the time to start thinking commercially. Real estate management is one very important part of the puzzle, from rationalising your portfolio to generating revenue. 

It is widely recognised that capital allowances can be a complex area with many layers of legislation, but councils are already starting to think about them within the longer term financial management of investments, especially around exit. Having the forethought really can pay off to ease budgetary pressures and reduce risk when making investment decisions. 

Authors: Jake Iles, managing director at Six Forward Capital Allowances and Edward Pitt, associate at TLT 

This article was first published by Public Property magazine

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at December 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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