Buying a Commercial Property? Why Capital Allowances Should Be Part of Your Due Diligence Process

When acquiring a commercial property, most buyers focus on the obvious issues.

They review the purchase price, arrange financing, instruct solicitors, commission building surveys and assess the commercial viability of the investment.

However, one area is frequently overlooked despite its potential to generate substantial tax savings:

Capital allowances

In our experience, many property purchasers only discover the importance of capital allowances after the transaction has completed. Unfortunately, by that stage, valuable opportunities may have already been lost.

Whether you are purchasing an office building, hotel, warehouse, restaurant, care home or industrial premises, understanding the capital allowance position before exchange or completion can have a significant impact on the overall value of the transaction.

What Are Capital Allowances?

Capital allowances provide tax relief on qualifying expenditure incurred on plant and machinery.

Whilst many people associate plant and machinery with equipment or manufacturing assets, the legislation also applies to a wide range of fixtures embedded within commercial buildings.

Examples can include:

  • Heating systems.
  • Electrical installations.
  • Air conditioning systems.
  • Lifts and escalators.
  • Fire alarms.
  • Security systems.
  • Data cabling.
  • Specialist lighting.
  • Sanitary installations.

As a result, a substantial proportion of the value of a commercial property may relate to assets that qualify for tax relief.

Why Capital Allowances Matter During a Property Acquisition

Capital allowances are unique because they often form part of the value of a property transaction without being separately identified.

A purchaser may spend millions of pounds acquiring a commercial property without fully appreciating how much of that purchase price relates to qualifying assets.

The ability to claim allowances can significantly improve the after-tax return on investment and enhance future cash flow.

For this reason, capital allowances should be considered as part of the wider acquisition process rather than as an afterthought.

The Importance of Capital Allowance Due Diligence

Commercial property due diligence typically focuses on legal, financial and structural issues.

However, tax due diligence should also include a review of the capital allowance position.

Key questions often include:

  • Has the seller previously claimed capital allowances?
  • Is a Section 198 election required?
  • Are there unclaimed allowances available?
  • What qualifying fixtures exist within the property?
  • Has entitlement to allowances been preserved?

Failure to investigate these issues before completion can sometimes result in the permanent loss of valuable tax relief.

The Hidden Risk of Section 198 Elections

One of the most important aspects of commercial property transactions is the treatment of fixtures.

Where a seller has previously claimed capital allowances, the buyer and seller may need to agree a Section 198 election under the Capital Allowances Act 2001.

The election effectively fixes the value of certain fixtures for capital allowance purposes.

If the position is not properly addressed during the transaction process, a purchaser may find that future entitlement to allowances is restricted or lost entirely.

This is one of the reasons why specialist advice should be obtained before contracts are exchanged.

Which Properties Offer the Greatest Opportunities?

Whilst opportunities exist across many sectors, some property types are particularly rich in qualifying expenditure.

Hotels frequently contain significant plant and machinery within guest accommodation, leisure facilities, heating systems and electrical infrastructure.

Restaurants often incorporate commercial kitchens, extraction systems, specialist lighting and refrigeration equipment.

Modern office buildings may contain extensive air conditioning systems, access controls, data networks and sustainability improvements.

Healthcare facilities, care homes, logistics centres and manufacturing premises can also contain substantial qualifying assets.

The larger and more complex the building, the greater the potential opportunity tends to be.

Can Historic Opportunities Be Recovered?

In some circumstances, yes.

We regularly encounter property owners who purchased commercial property several years ago without considering capital allowances.

Provided entitlement has not been lost and the relevant conditions are satisfied, it may still be possible to identify and claim previously overlooked allowances.

However, recovering historic opportunities is not always straightforward.

Documentation may be incomplete, previous owners may be difficult to trace and transaction records may be unavailable.

This is why early planning generally produces the best results.

Capital Allowances and Investment Returns

Many investors focus on rental yields and future capital growth when evaluating a commercial property acquisition.

Whilst these factors are clearly important, capital allowances can also have a significant impact on the overall return generated by an investment.

Tax relief obtained through capital allowances can improve cash flow, reduce taxable profits and free up funds for future investment.

In some cases, the value of the available tax relief can materially enhance the economics of the acquisition.

Why Specialist Advice Makes a Difference

Identifying capital allowances within a commercial property requires more than simply reviewing a fixed asset register.

It often involves a detailed understanding of property construction, tax legislation and valuation principles.

Specialist reviews may include:

  • Analysis of acquisition documents.
  • Review of historic expenditure.
  • Site inspections.
  • Cost segregation exercises.
  • Fixture valuations.
  • Capital allowance reports.

This combination of tax and surveying expertise is often where significant additional value can be unlocked.

Capital Allowances Should Be Considered Before Completion

Perhaps the most important message for commercial property purchasers is this:

Capital allowances should be considered before the transaction completes.

Waiting until after completion can limit available options and, in some cases, result in valuable tax relief being lost permanently.

By incorporating capital allowance planning into the acquisition process, purchasers can ensure that tax opportunities are identified and protected from the outset.

Final Thoughts

Commercial property acquisitions involve substantial investment and careful planning. Whilst legal due diligence, financing and valuation are all critical, capital allowances should not be overlooked.

A detailed review of the capital allowance position can often uncover significant tax relief opportunities and help maximise the overall return on investment.

At CapexOwl, we work with property investors, business owners, accountants and solicitors to identify and protect capital allowance opportunities during commercial property transactions. If you are considering the purchase of a commercial property, we would be delighted to discuss how capital allowances could improve the economics of your investment.