Fixtures in a commercial building carry tax relief to the buyer, but only if diligence secures the value before completion, and it is worth less than half its face amount.
Value each pool of allowances as a stream of reducing tax savings and discount it: amount × tax rate × writing-down allowance ÷ (discount rate + writing-down allowance). On an illustrative 40,000,000 UK office purchase with 5,000,000 of qualifying fixtures, the allowances are worth 601,648 today, 1.50 per cent of the price, against a headline tax saving of 1,250,000. If diligence does not secure a fixed value for them before completion, they are worth nothing.
Worked in full in Real Estate Transaction Due Diligence by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A buyer acquires an office building as an asset deal. The building's fixtures include lighting, heating and cooling, lifts and electrical systems, which fall in the special rate pool, and other fixtures that fall in the main pool. The capital allowances adviser has quantified the qualifying expenditure the seller incurred, and the seller has pooled it. All figures are illustrative, the writing-down and tax rates are inputs to check against those in force for your deal, and none of this is tax advice.
| Item | Value |
|---|---|
| Purchase price | 40,000,000 |
| Special rate pool fixtures (integral features) | 4,000,000 |
| Main pool fixtures | 1,000,000 |
| Writing-down allowance: special rate / main pool | 6.0% / 18.0% |
| Corporation tax rate | 25.0% |
| Buyer's discount rate | 8.0% |
1. The headline. 5,000,000 of qualifying expenditure is 12.5 per cent of the price, and 25 per cent tax relief on it is 1,250,000. That is the number that tends to appear in the investment paper, and it is 2.08 times what the allowances are worth.
2. The timing. Allowances are given on a reducing balance. The special rate pool gives 6 per cent of the remaining balance each year: 60,000 of tax saved in year one on 4,000,000, and after ten years only 46.1 per cent of the pool has been claimed. The main pool at 18 per cent is faster, 86.3 per cent in ten years.
3. The present value. A reducing balance discounted at a constant rate sums to a closed form:
PV = Amount × Tax × WDA / (r + WDA)
Special rate: 4,000,000 × 25% × 6% / (8% + 6%) = 4,000,000 × 0.1071 = 428,571
Main pool: 1,000,000 × 25% × 18% / (8% + 18%) = 1,000,000 × 0.1731 = 173,077
Total = 601,648, 1.50% of the price, 48.1% of the headline
In Excel: =B2*Tax*WDA/(Rate+WDA) for each pool
On the building's 2,200,000 of rent, paying the allowances' value on top of the 40,000,000 moves the net initial yield from 5.50 to 5.42 per cent: 8 basis points, enough to matter in a close bid.
For a buyer to claim allowances on fixtures in a second-hand building, two conditions apply under the UK rules. The seller must have pooled its expenditure (the pooling requirement), and the value transferred must be fixed, usually by a joint election under section 198 of the Capital Allowances Act 2001 made within two years of completion, or by a tribunal determination applied for within the same two years. Miss them and the allowances are lost to this buyer and every buyer after it.
The seller has the opposite interest. If it claimed allowances, the elected value is its disposal value: anything above its tax written-down value claws back allowances it has already had, through a smaller pool or a balancing charge, so it asks for its written-down value or a nominal 1. The election value is a negotiation, and it is worth money:
| Elected value | Present value to buyer | % of price |
|---|---|---|
| 5,000,000, the full pool | 601,648 | 1.50% |
| 2,000,000, the seller's written-down value | 240,659 | 0.60% |
| 1, nominal | 0 | 0.00% |
The difference between the first and the last line, 601,648, is decided in the sale contract, not in the tax return. It belongs in the diligence report alongside the findings that move the price, and in the heads of terms if it is to be argued at all.
| Case | Present value | % of price |
|---|---|---|
| Discount rate 6.0% | 687,500 | 1.72% |
| Discount rate 8.0% | 601,648 | 1.50% |
| Discount rate 10.0% | 535,714 | 1.34% |
| Main pool writing-down allowance 14% instead of 18% | 587,662 | 1.47% |
The special rate pool dominates: four fifths of the expenditure, at a rate so slow that 53.9 per cent of it is still unclaimed after ten years. The answer is more sensitive to the discount rate than to the main pool rate.
Buyers make one of two errors. Some put 1,250,000 in the model as if the relief arrived on completion, overpaying by 648,352 against its present value. More often, the allowances are left to the tax adviser after exchange, the election is never signed, and 601,648 of value disappears without anyone deciding to give it up. Ask for the seller's capital allowances history in the first information request, agree the election value in the heads of terms, and attach the signed election to the completion documents. For the other tax item that moves the price in a share deal, see how the latent tax discount is priced.
The value also assumes the buyer pays tax to use the allowances. A tax-exempt buyer gets nothing from them directly, though it should still secure the value for its own eventual buyer.
The book covers technical, legal and financial diligence before signing, and the free workbook for this case prices what a diligence exercise recovers.
Yes, on the fixtures, provided the seller pooled its own expenditure and the transfer value is fixed, usually by a joint election under section 198 or a tribunal determination within two years. In the illustrative case 5,000,000 of qualifying fixtures are worth 601,648 to the buyer; without the election they are worth nothing, to this buyer and every later one.
For a seller that claimed allowances the elected value is its disposal value, so anything above its tax written-down value claws back relief through a smaller pool or a balancing charge. It therefore prefers its written-down value or a nominal 1. At an elected 2,000,000 instead of 5,000,000 the illustrative buyer's allowances fall from 601,648 to 240,659 of present value, so the election value is a price point to negotiate.
Value each pool as a perpetuity of reducing tax relief: amount times tax rate times the writing-down allowance, divided by the discount rate plus the writing-down allowance. 4,000,000 in the special rate pool at 6 per cent, with 25 per cent tax and 8 per cent discounting, is worth 428,571 today.
This article is one calculation from Real Estate Transaction Due Diligence. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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