New allowances for structures and buildings and proposed new capital loss utilisation rules

19 January 2019

The recent Budget introduced some significant proposals in relation to the treatment of structures and buildings for tax purposes, with the introduction of a new capital allowances regime – the structures and buildings allowance (SBA). In a further measure that could impact property transactions by companies, the corporation tax rules for the utilisation of carried forward capital losses are to be aligned with the rules which apply to other types of corporate tax losses following reforms introduced in April 2017.

Structures and buildings allowance

The SBA is intended to provide tax relief for qualifying expenditure on the construction of non-residential property (eg hotels, offices, care homes, retail and wholesale premises, factories and warehouses) from 29 October 2018. For this purpose, construction expenditure includes the repair, renovation and conversion of existing property as well as expenditure on new structures or buildings. Relief is provided at a rate of 2 per cent on a straight-line basis over 50 years and expenditure on the acquisition of land or rights over land does not qualify for relief.  

The Government is currently consulting on certain key aspects of the proposed regime before publishing detailed draft legislation. Although claims for SBA will impact tax base cost for capital gains purposes, this measure has been broadly welcomed as a means of providing earlier tax relief for high cost assets.  

Those with long memories will recall that relief under the industrial buildings allowances regime, withdrawn from 2008, was given over 25 rather than 50 years, so whilst the SBA is not as generous for certain structures and buildings, some tax relief for eligible property whilst it is used by a business is better than none at all. 

Reform of carried forward capital loss utilisation rules

A notable exclusion from the April 2017 reform of the corporate loss utilisation rules were carried forward capital losses. As a consequence, taxpayers have been able to use carried forward capital losses to shelter up to 100 per cent of chargeable gains, whilst utilisation of other carried forward losses has been subject to restrictions.  

The Government confirmed in the Budget that the rules regarding carried forward corporate capital losses are to be aligned with other carried forward corporate losses from April 2020, with the detail currently under consultation.  

Broadly, the April 2017 reform introduced a group-wide £5m annual deductions allowance, meaning that up to £5m taxable profits can be sheltered in full using carried forward losses, plus 50 per cent of any excess profits over £5m. Current year losses can be utilised against current year profits without such restriction.  

The new corporate capital loss utilisation rules are expected to allow the taxpayer to determine how much of the £5m deductions allowance is allocated to carried forward capital losses, with no implications for the use of current year capital losses. In practice, these new rules will impact UK groups with total taxable profits in excess of £5m that crystallise chargeable gains that would, under current rules, be relieved in full against carried forward capital losses.

Practical implications for taxpayers

The availability of the SBA will now be a consideration on a transaction involving qualifying property. It will, therefore, be important for the vendor to evidence the availability of SBA and the amount of SBA claimed to the date of disposal.  

The reform of the corporate capital loss rules could be a key issue for taxpayers disposing of property and other assets subject to capital gains rules post-April 2020. Transactions which do not generate a tax liability under current rules could trigger a cash tax charge going forward.

Taken together, these measures mean that greater care will be needed by taxpayers to ensure that the potential tax costs of disposals are modelled and understood prior to the transaction and robust and detailed evidence is kept on file.  

For more information please get in touch with Suze McDonald.