Legal & Administrative

Section 198 election

Understand Section 198 elections for UK commercial property. Learn how this joint election fixes capital allowances value for fixtures between buyers and seller

What is a Section 198 election?

A Section 198 election is a critical joint agreement made by a buyer and seller of commercial property in the UK to formally fix the value of fixtures for capital allowances purposes. Governed by Section 198 of the Capital Allowances Act (CAA) 2001, this election is the definitive mechanism for establishing the tax base for plant and machinery allowances when a property changes hands. It provides certainty regarding the capital allowances position for both parties, preventing potential disputes with HMRC and ensuring a smooth transaction. The election must be made within two years of the transfer of ownership and must specify the agreed value of the fixtures.

At Capex Check, we understand that navigating the complexities of Section 198 elections can be daunting. Our specialist team works closely with both buyers and sellers to identify all qualifying integral features and other plant and machinery, ensuring the elected value is robust, compliant, and maximises the tax relief available. We prepare and manage the entire election process, from initial valuation to formal submission, providing peace of mind and significant tax advantages.

Why a Section 198 election Matters

A Section 198 election is critically important as it provides clarity and certainty regarding the capital allowances available on fixtures within a commercial property transaction, directly impacting the buyer’s future tax liabilities. Without a valid election, the buyer’s ability to claim allowances is severely limited. They may be restricted to claiming capital allowances on the lower of the seller’s original cost or the market value of the fixtures at the time of sale, potentially missing out on significant tax relief. For instance, HMRC data indicates that a substantial portion of commercial property transactions overlook capital allowances, leading to underclaimed tax relief.

This mechanism prevents the ‘leakage’ of capital allowances, ensuring that qualifying expenditure on plant and machinery, such as integral features, can continue to be relieved. It also mitigates the risk of a balancing charge for the seller if they have previously claimed allowances, by effectively transferring the tax written down value. According to a 2023 industry analysis, proper utilization of Section 198 elections can unlock an average of 15-25% of the property purchase price in capital allowances for buyers.

Capex Check’s approach ensures that our clients never miss out on these vital tax savings. Our Fixtures Elections (Section 198) Service is designed to proactively identify and secure these allowances, turning potential liabilities into significant tax assets. We’ve seen firsthand how a well-executed Section 198 election can dramatically improve a buyer’s cash flow and investment returns.

Common Misconceptions About Section 198 election

There are several misunderstandings surrounding Section 198 elections that can lead to missed opportunities:

  • Misconception: A Section 198 election is always mandatory for capital allowances on fixtures.
    • Reality: While highly recommended, it is not strictly mandatory. However, without it, the buyer’s ability to claim allowances is severely limited, often to nil if the seller has not met the pooling requirement for their expenditure. Capex Check always advises pursuing a Section 198 election to secure the maximum possible allowances.
  • Misconception: The elected value can be any figure agreed upon by the parties.
    • Reality: The elected value must reflect the actual market value of the fixtures at the time of sale and cannot exceed the seller’s original qualifying expenditure or the buyer’s purchase price for those fixtures, as per CAA 2001 guidelines. Our expert valuers at Capex Check ensure the agreed value is defensible and compliant with HMRC regulations.
  • Misconception: The election can be made at any point after the property transfer.
    • Reality: The Section 198 election must be made within two years of the date of transfer of ownership of the relevant interest in the land, as stipulated by HMRC regulations. Missing this deadline can result in the loss of valuable allowances. Capex Check’s project management ensures all deadlines are met, providing timely and efficient service.

Section 198 election in Practice

Consider a scenario where ‘Property Co A’ sells a commercial office building to ‘Investment Group B’ for £5 million in 2023. The building contains significant plant and machinery, including air conditioning, lifts, and electrical systems, which ‘Property Co A’ originally installed for £1 million and had claimed £400,000 in capital allowances, leaving a tax written down value (TWDV) of £600,000.

Without a Section 198 election, ‘Investment Group B’ might struggle to claim any allowances, as ‘Property Co A’ might not have fully pooled their expenditure or might incur a balancing charge. To optimize the tax position for both parties, ‘Property Co A’ and ‘Investment Group B’ engage Capex Check to make a Section 198 election.

Our capital allowances specialists identify the qualifying fixtures and agree a value of £800,000 for these fixtures at the time of sale, which is within the TWDV and market value. We then jointly sign the Section 198 election form with both parties and submit it to HMRC within the two-year deadline. This election ensures that ‘Investment Group B’ can claim capital allowances on £800,000 of qualifying expenditure, significantly reducing their taxable profits over time. ‘Property Co A’ avoids a balancing charge on the sale, as the allowances are effectively transferred. This practical application demonstrates how Capex Check delivers tangible tax benefits for our clients.

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