Troubled waters for capital allowances

Will you be ready for the new capital allowances “pooling requirement” when you sell or buy your next agricultural building?

A new capital allowances “pooling requirement” came into force from 1 April 2014 (for corporation tax) and 6 April 2014 (for income tax). Combined with the “fixed value requirement” (which came into effect from April 2012), this makes it more important than ever that thought is given to capital allowances sooner rather than later on property transactions, as failure to deal with them in the sale contract could mean:

  • A buyer of an agricultural property can never benefit from capital allowances (and the property may be less attractive to potential future buyers)
  • A seller misses a valuable marketing opportunity, if allowances are available to a buyer, and could push up the price the buyer is willing to pay

This briefing sets out some background on capital allowances, the changes in 2012, and the changes that came into effect in April 2014.


Capital allowances can sometimes be available where a buyer acquires a second hand property – in particular, in relation to any expenditure on fixtures located at the property (which could be very significant eg, bespoke air conditioning or humidity control systems in storage barns, or other farm machinery affixed to the property).

Not all expenditure qualifies for allowances at the same rate. There are two rates (18 per cent for expenditure included in the “main pool” and 8 per cent for expenditure in the “special rate pool” – which includes expenditure on items like thermal insulation, electrical systems, water heating systems, etc). When a taxpayer wishes to claim capital allowances, it “pools” its qualifying expenditure by including it in a tax return in one of the pools and claiming allowances at the appropriate rate. The allowances claimed reduce the taxable profits of the taxpayer.

On property acquisitions, the seller and buyer will often agree how much of the overall purchase price for the property should be apportioned to fixtures. Subject to certain restrictions (beyond the scope of this briefing) this apportioned amount is the amount on which the buyer can claim capital allowances following completion. So, for example, if a property is purchased for £1 million and the parties agree £100,000 of that amount should be apportioned to fixtures in the property, the buyer will base its capital allowances claims on expenditure of £100,000 (and assuming all of this qualifies for allowances at 18 per cent, would be able to claim £18,000 of allowances in its first accounting period). 

What changed in April 2012?

The “fixed value requirement” came into force in April 2012. Very broadly speaking, this requires taxpayers who wish to pass on the benefit of capital allowances to a buyer to either (i) enter into a formal “section 198 election” (filed with HMRC) with the buyer to apportion part of the property purchase price to fixtures, or (ii) apply to the Tax Tribunal for a valuation (much less common in practice).

The requirement only applies if the seller (or a person who has owned the property since April 2012 if not the immediate seller) has historically claimed allowances.

The new “pooling requirement” was unveiled at the same time as this “fixed value requirement” but its implementation was delayed by two years – so it has only just come into force now.

What is the new “pooling requirement”?

With effect from April 2014, as well as ensuring that the “fixed value requirement” (if it applies) is met, parties to a land transaction will need to meet the “pooling requirement” if they intend to pass the benefit of capital allowances on to a buyer.

In essence, this new requirement is satisfied if the seller has “pooled” their expenditure – by including it in a tax return sent to HMRC. Technically the seller does not actually need to claim allowances, as simply identifying qualifying expenditure and including it in a return sent to HMRC is sufficient.

If the seller has been claiming allowances then the position is very straightforward – the “pooling requirement” will already have been met by virtue of those claims. Some care is needed if there is any expenditure incurred by the seller which has not yet been pooled (eg, for the current accounting period), but generally speaking the procedures here should be fairly simple.

The position becomes much more complex, and the commercial dynamics of the transaction potentially change, if either of the following apply:

  • The seller could have claimed capital allowances, but has simply thus far chosen not to do so (or not noticed that it could)
  • The seller is not entitled to claim capital allowances (eg, it is a property trader, or some form of tax exempt entity, like a charity or pension fund)

In the case of a seller who could claim but has not done so, the negotiations with the buyer could become rather complex. The absence of claims could be attributable to either the seller’s lack of interest in capital allowances (perhaps it has losses or other tax reliefs so has no need to claim them) or unawareness of the entitlement to claim (in which case the transaction itself may make the seller interested).

Issues to think about

Can the buyer persuade the seller to pool its qualifying expenditure by submitting a tax return to HMRC? If not, and this effectively kills the availability of allowances for the buyer, is a price chip appropriate? Or should the buyer walk away from the deal, taking into account any effect on the future marketability of the property?

Will the seller want:

  • To keep some of the allowances which subsequently become available if it pools its expenditure?
  • Reimbursement of its costs for pooling, especially if it takes no tax benefit from the process?
  • What contractual drafting is necessary?
    • Obligations on the seller to pool for the accounting period in which completion occurs (if pooling has not been done by completion)? Or should this be done by way of amending a tax return for a prior accounting period?
    • Conduct of any dispute with HMRC if the pooling, or amount of allowances, is contested?
    • Is the appointment of a capital allowances expert necessary, or should the parties be allowed to appoint one in the case of dispute?
    • Timetable for entering into the appropriate s198 election following the pooling, and agreed values for the relevant fixtures?

Where a seller is not entitled to claim capital allowances, the pooling requirement will not apply – unless a previous owner (who held the property at any time on or after March 2014 and who was entitled to claim allowances) was entitled to claim (in which case pooling by that prior owner would be necessary). If a non-taxpaying entity or property trader wishes to “preserve” allowances for future buyers, they will need to ensure that the pooling requirement, if applicable, is met when they acquire the property.


It can be seen from all this that, in some cases, the new “pooling requirement” will bring significant additional complexity to property transactions. Detailed engagement with the CPSEs will be necessary (including making sure the replies are satisfactory) and will be particularly important for a buyer, in some cases so that it can ascertain the position of prior owners.

To ensure the maximum benefit is realised from capital allowances, the parties now need to consider a number of factors, including the tax position of the seller and potentially prior owners and their ability to make claims, as well as the tax position of the buyer, and whether it can directly benefit from claims or is seeking merely to preserve allowances for a potential future buyer.

In complex cases (in particular where the “pooling requirement” will have to be met as part of the transaction mechanics) detailed and careful drafting may be required.

All of which means that capital allowances need to be considered in the early stages of any transaction, and thought given to the potential benefits and risks sooner rather than later.

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Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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