Stud owners could be missing out on valuable tax relief. Owners should also be aware of how they can take advantage of the changes to capital allowances announced in the 2018 Budget.
Many stud farm owners are missing the opportunity to take advantage of capital allowances when buying a new stud or when carrying out major works. At a time when businesses are spending large sums of money, an understanding by them and their advisers, of what tax relief opportunities are available is crucial for financial efficiency.
When a business acquires a stud farm there will usually be several categories of assets acquired – commercial buildings, agricultural land, moveable items of plant and machinery, fixtures and fittings and often some residential buildings. As long as the business carries out a qualifying activity, for example bloodstock breeding, then capital allowances will be available on qualifying expenditure. This will mean that the purchase price will need to be apportioned between the various categories of assets acquired.
Moveable items of plant and machinery and fixtures should automatically qualify for capital allowances and, broadly, residential buildings will not generally qualify. Any expenditure on items which are structural in nature i.e. buildings and fixed items such as walls and floors do not qualify for capital allowances. Therefore, once the purchase price of the stud is apportioned any structural element attributed to commercial buildings, residential buildings or land will usually be set aside and not looked at further.
However, commercial buildings (including stable blocks) will often include Property Embedded Fixtures and Features (PEFFs) which are eligible for capital allowances. Many fixtures and features will be relatively obvious, for example fire alarms, emergency lighting, and sanitary ware installations. However, many will be less obvious, for example electrical systems including plug sockets, cold and hot water installations. Many of these less obvious items are often referred to as ‘integral features’.
There are then several key issues to address:
- When did the vendor incur the expenditure on the PEFFs originally
- Has the vendor ever claimed capital allowances on the PEFFs before
- Whether the vendor had ever ‘pooled’ their expenditure
The issue could be made significantly simpler if the vendor acquired the property before April 2008, or incurred expenditure on improvements to the commercial buildings before this date as integral features were not in force. As allowances have not been claimed it is therefore possible for the buyer to claim allowances on these costs on a ‘just and reasonable apportionment’ of the purchase price (this is where the apportionment of the original cost is so crucial).
Arriving at a value of the integral features is usually a specialist area and normally a survey will need to be done of the property to establish the relevant values. Third party specialist firms exist to carry out these surveys
However, the likelihood is that the vendor has incurred expenditure on ‘integral features’ since April 2008. This is where the CPSE and section 198 election come into play.
If the vendor has pooled their expenditure for capital allowances then a written disposal value statement will be drawn up that shows the apportionment of the purchase price between all the various categories of assets acquired. This statement will usually go into detail showing expenditure in each tax pool of the vendor and whether they are integral features or not (with the exception of the April 2008 date noted previously).
The value of the PEFFs shown on the disposal value statement is known as the ‘disposal value’ and it is worth noting where a building is purchased after April 2008, there is a limit on the amount of qualifying expenditure that can be attributed to fixtures and fittings for capital allowances purposes, being the vendor’s cost. As such, the amount that the purchaser can claim capital allowances on will be restricted to the ‘disposal value’, which cannot exceed the vendor’s original capital allowance qualifying expenditure.
Lastly, there is the potential that the vendor may now wish to claim allowances on these costs, as they have to ‘pool’ them anyway. If they do, then a disposal value statement will not be required, but instead a fixed value statement (commonly referred to as a ‘section 198 election’) will be issued which clearly states the values on which the purchaser will be able to claim capital allowances on.
Changes in 2018 Budget
The Budget saw several changes to legislation that will affect stud farms and capital allowances:
- The Annual Investment Allowance (AIA) which provides 100% tax relief on qualifying expenditure on plant and machinery increased from £200k to £1m from 1 January 2019 (until 31 December 2020).
- A business has an accounting year end that is not 31 December an apportionment calculation must be undertaken.
- A new capital allowance called Structures and Buildings Allowance (SBA) will allow businesses to claim an allowance of 2% of the cost of new non-residential structures and buildings. This applies to contracts for the physical construction of the building that are entered into on or after 29 October 2018. The detail of the policy does indicate that relief will be limited to the costs of physically constructing the structure or building. However this does include the cost of demolition or land alterations necessary for construction and direct costs required to bring the new asset into existence. Therefore, if there are any plans for barns/farm buildings this can be another tax relief option.
- From April 2019 the rate of capital allowances for the ‘special rate pool’ will reduce from 8% per annum to 6% per annum. This will only be relevant where a purchaser has acquired a stud farm where the vendor has pooled their allowances. The special rate pool would usually include expenditure on integral features within commercial buildings.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.
The tax treatment depends on the individual circumstances of each client and may be subject to change in future.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.