A 3% structures and buildings allowance (SBA) is available in the UK for expenditure on the purchase, construction or renovation of non-residential buildings and structures.
The allowance is available provided the expenditure is incurred on or after 29 October 2018 and all relevant construction contracts were signed on or after that date.
Who can claim the allowances?
A UK taxpayer can claim SBAs if they hold the 'relevant interest' in the building or structure. The relevant interest is the interest in the building or structure which was held by the person who incurred the construction expenditure.
If a lease is granted for a capital sum of a building or structure qualifying for SBAs, whether the landlord or the tenant can claim allowances will depend upon the length of the lease. Where the lease is for less than 35 years, the allowances remain with the lessor. If the lease is for 35 years or more and the lessee pays a substantial premium (broadly, two-thirds or more of the value of the property), then the right to allowances passes to the lessee.
Tenants
The tenant under a lease of 35 years or more granted at a substantial premium should be able to claim allowances on the original construction cost of the property.
A tenant under a lease of any length may be able to claim SBAs if they incur qualifying expenditure on new building works.
Expenditure qualifying for SBAs
Expenditure must be on the construction or acquisition of non-residential structures and buildings. The buildings or structures can be located in the UK or overseas.
The structure must be used for a qualifying activity, which is taxable in the UK. Qualifying activities are:
- any trades, professions and vocations
- a UK or overseas property business (except for residential and furnished holiday lettings)
- managing the investments of a company
- mining, quarrying, fishing and other land-based trades such as running railways and toll roads.
SBAs are only available in respect of construction costs. These include fees for design, preparing the site for construction, construction works, renovation, repair and conversion costs and fitting out works.
SBAs cannot be claimed for the cost of the land itself. They cannot be claimed for the cost of integral features and fixtures, or for expenditure on plant and machinery - separate tax relief by way of capital allowances may be available for these costs.
The first use of the building or structure, after the relevant expenditure was incurred, must be non-residential.
When determining the SBAs that should be available, there are different rules depending on whether the structure has been purchased from a developer or non-developer; whether the structure is purchased used or unused; and the number of times the structure has been sold since the construction costs were incurred.
Claiming the allowances
SBAs are available at the rate of 3% per year on a straight-line basis over 33⅓ years. They are claimed on a tax return, but can only be claimed if you have an 'allowance statement'.
The first person to use the structure must create a written allowance statement which must include:
- information to identify the structure, such as address and description
- the date of the earliest written contract for construction
- the total qualifying costs
- the date the structure started to be used for a non-residential activity.
The buyer of a used structure will only be able to claim allowances if they get a copy of the allowance statement from the previous owner, before the claim for SBAs is made.
Tax exempt buyers cannot claim SBAs. However, when purchasing a structure, it will still be important for a tax exempt buyer to obtain a written allowance statement so they can pass the benefit of unused SBAs to a future buyer of the building.
For unused buildings where there is no seller allowance statement, buyers should seek warranties from sellers that construction was carried out under contracts entered into on or after 29 October 2018.
Disposal of the building
SBAs cannot be claimed after you have disposed of the building or structure. The disposal will not give rise to a balancing allowance or charge for the seller. However, the amount of the SBA claim may increase any capital gain on a subsequent sale because it will be added to the disposal proceeds.
As explained above, the buyer should be able to take over claiming the allowances for the remainder of the allowable period, providing it is using the building or structure for a qualifying purpose.
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