The new Structures and Buildings Allowance, announced at Budget 2018, provides for capital allowances for expenditure incurred on or after 29 October 2018 on the construction of a building or structure in qualifying use. The annual rate of allowance is 2%.
After some delay, HMRC has now published the draft rules for consultation.
The new rules apply if the construction of a building or structure begins on or after 29 October 2018. The construction of a building or structure is treated as beginning before 29 October 2018 if:
- any contract for the construction of the building or structure is entered into before that date; or
- any contract for the construction of the building or structure is entered into on or after that date but a connected preparatory contract is entered into before that date.
Broadly, three things are required for costs to qualify for the new relief, namely:
- qualifying expenditure is incurred on construction or acquisition;
- the building or structure is not in residential use; and
- there is a qualifying activity.
These points are examined in more detail below.
A person is entitled to an allowance for a given period if they hold the relevant interest in the building or structure in relation to the qualifying expenditure.
A relevant interest refers to the interest in the building when the qualifying costs are incurred. The person who holds that interest will generally be entitled to the relevant allowances. A relevant interest can be either freehold or leasehold but note that special rules may apply to leases of 35 years and over.
The basic rule is that the allowance for a chargeable period of one year is 2% of the qualifying expenditure, for a period of up to 50 years. A person ceases to be entitled to an allowance if the building or structure is brought into residential use or demolished.
What is qualifying expenditure?
If capital expenditure is incurred on the construction of a building or structure and the relevant interest in the building or structure has not been sold or, if it has been sold, it has been sold only after the building or structure has been brought into qualifying use, the capital expenditure qualifies for relief. Certain site preparation costs are also allowable.
There are special rules to specify the qualifying expenditure where the building is sold before the building is used and further rules for sales by developers.
Expenditure incurred on the acquisition of land or rights in or over land (including fees, stamp duty and other incidental costs attributable to the acquisition) or on altering land is excluded, as is expenditure incurred on, or in connection with, seeking planning permission (including fees and related costs). Expenditure on the provision of plant or machinery is also excluded.
However, capital expenditure incurred on the renovation or conversion of a part of a building or structure or on repairs to a part of a building or structure that are incidental to the renovation or conversion of that part is treated as if it were capital expenditure on the construction of that part of the building or structure for the first time and so is subject to a separate 50 year write off.
Broadly, a qualifying activity is a trade, an ordinary UK or overseas property business, a profession or vocation.
A building or structure is in ‘qualifying use’ if it is in significant non-residential use for the purposes of a qualifying activity carried out by the person who has the relevant interest in the building or structure.
Residential use is broadly defined but specifically includes:
- use as, or ancillary to use as, a dwelling-house; and
- a building in use as student accommodation, namely if the accommodation is purpose-built, or is converted, for occupation by students and the accommodation is available for occupation by students on at least 165 days of each calendar year.
Evidence of qualifying expenditure
One of the important parts of the new rules is that a person who is entitled to an allowance will, before they first make a claim, have to make a written statement containing the date of the earliest written contract for the construction of the building or structure, the amount of qualifying expenditure incurred on its construction or purchase, the date on which the building or structure is first brought into non-residential use and such other supplementary information as required HMRC.
This publication has been prepared by RRL LLP. It is to be treated as a general guide only and is not intended to be a comprehensive statement of the law or represent specific tax advice. No liability is accepted for the opinions it contains, or for any errors or omissions. All rights reserved.