A taxing issue

I am about to take on a leasehold pub and my new landlord is offering me either a rent-free period or a capital contribution to help me fit it out. What is the best option?

There are three basic types of financial incentive most frequently offered as an inducement to tenants to sign up for a new lease. These are:

- Reverse premium payment to tenant - not linked to any specific fit out expenditure

- A landlord's capital contribution toward a tenant's fitting out works

- A rent-free period.

Each has different tax and accounting implications for the landlord and tenant so it is wise to explore all the options before making a final decision. In most cases the rent-free period is best as the business operator then incurs the entire cost of any works and thus owns the entitlement to any tax reliefs. In a fit-out more than half the cost may well become tax relieved.

Can you claim any tax relief on the acquisition of a pub?​

Yes you can. There is a common misconception that you can only claim capital allowances on fit out and refurbishment expenditure. This is not the case. For example, if you acquire a pub that includes items of fixed plant and machinery and heating, part of the purchase price will relate to plant and machinery and will attract capital allowances. One complication to this occurs where a prior owner of the pub has claimed capital allowances on the same assets.

As part of a kitchen refit, we need to knock a hole in the back wall so that we can put in a new range. This hole will be filled in once the cooker is installed. Can we claim any tax relief on the cost of this additional works?​

There is specific provision within the Capital Allowances Act 2001 to give tax relief on capital expenditure incurred in an existing building for builders' work in connection with the installation of plant and machinery. There does need to be a direct link between the structural works and the installation of the plant but in many instances these "incidental works" can add greatly to tax savings.

Above my pub I have some vacant space that I am considering converting into a flat for rental. Are there any tax breaks available for this type of works? ​

Property owners and occupiers can claim tax relief on capital expenditure incurred on or after May 11, 2001 on the renovation or conversion of vacant or underused space above shops and other commercial premises to provide flats for rent. A person can claim flat conversion allowances if they incur qualifying expenditure converting or renovating a qualifying property to make one or more qualifying flats for letting. There are a number of qualifying conditions but the benefit is exceptional as the entire allowable cost can be claimed in the year it is incurred.

Do capital allowances have any impact on securing funding for a project?​

Banks are becoming more aware of the value of capital allowances and how they can have a major impact on the viability of a project or business plan. If you are able to demonstrate to a bank an improved cashflow by utilising capital allowance, they will see this as one way that their lending risk could be reduced or perhaps funding levels can increase.

We are in the process of changing the theme of our pub to recreate a Canadian lodge. We have sourced a stuffed moose head to mount above the bar. Will we get capital allowances on this?​

Part of your trade as a publican is to attract customers with a certain mood or ambience. If assets are specially chosen and installed to help create the ambience there is a strong case for claiming such assets. So the moose head should indeed qualify for capital allowances as this is an integral part of the theme that is being created.

I am about to sell my pub. Capital allowances have been claimed on fixed items of plant and machinery during the time I have owned it. Is there anything that needs to be considered prior to selling?​

If you are selling a building, the Capital Allowances Act 2001 allows the seller to structure the disposal of a property in a way that allows him to retain the benefit of capital allowances already claimed. Some simple tax planning at the time of sale will protect against any repayment.

Do capital allowances impact on capital gains tax?​

Many property investors do not claim capital allowances because they mistakenly believe that if part, or all of the allowances are retained upon disposal of the property, a higher capital gains tax charge will result. The only times when capital allowances are taken into account in the chargeable gain computation are:

- If the asset is sold at a loss

- If the asset is a wasting asset.

Otherwise the normal computation rules are applied as if no capital allowance claims were ever made, which effectively can allow two sets of relief on the same expenditure.

David Henry is an associate for Davis Langdon LLP and specialises in advising on capital allowances on pubs, restaurants and nightclubs​