The Structures and Buildings Allowance (SBA) is a welcome relief at a tough time for many businesses. It must be considered properly, however, to ensure that the administrative burden – and any future tax implications - do not outweigh the benefits.
The SBA provides relief for expenditure on the construction, conversion or renovation of non-residential properties at an annual rate of 3% (2% prior to 31 March 2020). It is available for qualifying expenditure on contracts entered into from 29 October 2018. The Government also recently announced an enhanced allowance of 10% for buildings in new Freeport locations.
It is a generous relief, but the complex rules governing how it interacts with other capital allowances provisions and chargeable gains create additional considerations. Businesses need to carefully analyse and segregate costs, and meet strict administrative requirements to be eligible for relief.
The SBA can be claimed for expenditure on both UK and foreign properties by individuals, companies and partnerships that are carrying on a qualifying activity, such as a trade or property business, and that are within the charge to UK tax. Qualifying expenditure includes the construction, conversion and renovation of commercial structures and buildings. It specifically excludes spending on residential property, acquiring land and associated fees, and on land reclamation, remediation and landscaping. It is worth noting that ‘residential use’ is defined broadly, and includes residential accommodation for school pupils, prisons and student accommodation.
The qualifying expenditure is based on the actual construction costs. As such, the SBA claim may be different to the price paid to a third-party developer, depending on whether or not the property is brought into use before sale by the developer. It may therefore be necessary to obtain original cost information from the developer, which can be problematic if the developer considers the information to be commercially sensitive. The rules do not allow for estimated costs; the qualifying expenditure is nil if the actual amounts cannot be supported.
In a mixed-use development, known costs can be apportioned between residential and non-residential purposes, and SBAs claimed on the non-residential element. This may apply, for example, where part of the building is used for the taxpayer’s trade and part is a flat let out for residential use. If, however, the extent to which an asset is used for a qualifying activity is ‘insignificant’ then none of the expenditure will qualify. This may occur when an asset is only used in a qualifying activity for a few days each year.
Interaction with other reliefs and taxes
The SBA is not available on expenditure that qualifies for other tax reliefs, and other capital allowances take precedence over the SBA. Claimants therefore cannot allocate expenditure to SBAs without undertaking a detailed analysis and considering other relevant tax reliefs. Additionally, expenditure qualifying for the SBA will not be eligible for the Annual Investment Allowance.
Claimants are required to keep a specific record of the actual costs claimed. The written statement, called an ‘allowance statement’, must contain information on the construction contracts, the level of expenditure and the use of the building. This is still worth doing even if the owner is not subject to UK tax because future buyers will need an allowance statement to claim the SBA and any missing information may impact the sale price.
If projects are competed in phases or multiple projects are carried out in a period, statements may be required for each stage of the property works. Renovation and conversion costs are treated as if they are new construction costs, and separate records are required in the same way as if the expenditure was incurred on that part of the building for the first time. As such, a significant number of allowance statements are often necessary.
When a business sells an asset on which the SBA has been claimed, the right to claim the remaining SBAs will usually transfer to the new owner at tax written down value. Any SBAs already claimed will be factored into the calculation of chargeable gains on the sale. Generally, if a property might be sold the SBA will only accelerate the tax relief that would otherwise be included as part of the original base cost or enhancement expenditure on disposal.
There are also specific rules for leaseholders, though the right to claim SBAs will depend on the length of the lease. As such, it is important to consider the availability of the SBA and identify which party is entitled to claim it when planning construction or conversion works on let property.
The SBA offers a valuable deduction for capital expenditure in the years a property is used before disposal. The overall benefit of SBAs needs to be considered alongside the administrative burden of identifying the qualifying expenditure and the impact on the base cost of the asset. At Smith & Williamson, we can help you manage the allowances effectively, so do get in touch if you would like to explore SBAs in more detail.
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. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. 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 writing.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.
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This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.