When marital relationships come to an end, one of the most intricate and emotionally charged aspects to navigate is the division of assets. Among other holdings, this can include jointly owned or individually held commercial properties. These assets are not only valuable in terms of their market worth, but also because of the tax reliefs they may carry — capital allowances being a significant element. Capital allowances can radically influence the tax position of either party post-divorce, impacting not just the settlement value but also long-term financial planning.
Unfortunately, capital allowances are often neglected or misunderstood during divorce proceedings, potentially leading to missed opportunities or unfair settlements. This article delves into how capital allowances intersect with the complexities of divorce, offering insights into how they might be accounted for in financial negotiations and settlements involving commercial property.
A Brief Overview of Capital Allowances
Capital allowances are a form of tax relief for businesses and investors on certain types of expenditure on commercial property. Broadly speaking, they apply to the cost of acquiring, upgrading or improving qualifying items within a commercial building. These items — known as ‘plant and machinery’ — could include things like heating systems, air conditioning, lifts, security systems and more embedded fixtures.
In the United Kingdom, these allowances allow taxpayers to deduct a portion of the cost of these qualifying items from their taxable income, effectively reducing their tax liability over time. Sometimes, capital allowances can be claimed in full immediately (for example under the Annual Investment Allowance), or spread out over several years via Writing Down Allowances. To qualify for and continue to benefit from capital allowances, the property owner must still carry out business activity that justifies the claim. They are not automatic and must be identified and documented, ideally with detailed schedules to be submitted to HMRC.
Capital Allowances as an Invisible Asset
One of the key characteristics of capital allowances is their invisibility. Unlike a commercial property’s market value which can be readily appraised, identifying and calculating capital allowances requires technical expertise and access to relevant paperwork and cost breakdowns. As such, during divorce proceedings, these allowances may not appear on balance sheets and may not be immediately considered when discussing the division of assets.
However, this invisibility does not make them any less valuable. Depending on the nature of the property and the timing of claims, capital allowances may be worth tens or even hundreds of thousands of pounds in potential tax savings. In some cases, unclaimed allowances on a property can still be accessed, offering one spouse unexpected fiscal benefit over the other if left unaddressed.
This is why a thorough review of all commercial property assets should include a capital allowances assessment. Failing to do so might lead to one spouse unknowingly giving away not just the asset itself, but also a valuable, ongoing tax relief that could significantly enhance its real financial worth.
How Divorce Impacts Ownership of Capital Allowances
At the point of divorce, assets are either divided or transferred, based on a range of legal, financial and personal considerations. For commercial property, this ownership shift has a direct impact on who gets to benefit from the property’s capital allowances. These do not follow the property automatically in an unrestricted fashion; instead, they must be formally transferred through a process known as a Section 198 CAA 2001 election.
This election, agreed upon between the parties and submitted to HMRC, fixes the amount of capital allowances that are transferred to a new owner of the property. Crucially, the election must be made within two years of the date of the property transfer and must be agreed upon by both parties. If no election is made, HMRC may impose a default value which could be ‘nil’, effectively destroying those allowances for both the outgoing and incoming owner.
Failure to address this aspect of a divorce settlement can have disastrous consequences. Imagine a situation where one party retains ownership of a commercial property but does not also secure the associated capital allowances due to oversight or lack of legal advice. They own the property, but not the potential tax savings. Conversely, a spouse who gives up ownership might still hold residual rights to capital allowances, or at the very least, could have leveraged it for greater settlement value had it been properly considered.
Valuing Capital Allowances in a Divorce Settlement
Determining how capital allowances affect the value of a commercial property in the context of a divorce is complex, primarily because they represent future tax savings rather than immediate cash or income. Yet, when you’re aiming for an equitable division of assets, all potential financial benefits should be factored into the negotiation.
To accurately value capital allowances, a professional capital allowances specialist should be engaged. They’ll not only identify the qualifying expenditure that has not yet been claimed, but also estimate the value of any outstanding allowances. They may also assist in logging historic claims to determine what residual value remains for future benefit. This valuation exercise should then feed into the overall financial modelling of the settlement.
For instance, if one party retains a commercial property with unclaimed capital allowances worth £250,000, this should be weighed up against the tax relief they’ll enjoy over coming years, depending on their income profile. Meanwhile, the other party might require another type of asset — such as investments or cash — to offset the imbalance of this untapped value.
Determining which spouse benefits most from capital allowances will often depend on their individual tax circumstances. A higher-rate taxpayer with significant taxable business profits will gain more from ongoing tax relief than someone with little to no trading income. Consequently, capital allowances often hold greater value for business-operating spouses and should be negotiated accordingly.
Practical Legal Considerations and Disclosure Obligations
The divorce process in itself imposes a duty on both parties to provide full and frank financial disclosure. For asset assessments to be fair and accurate, all interests in commercial property should be clearly stated, including details of any capital allowances claimed or claimable. This information may reside not only in capital expenditure records but also in tax returns, previous Section 198 elections, and property acquisition documentation.
Solicitors and financial advisors must therefore encourage thorough due diligence. This may include commissioning a capital allowances review as part of the asset disclosure process, particularly if either party owns, or has an interest in, commercial property purchased after April 2012. Since then, changes in legislation mean allowances must be tracked with greater rigour — failing to make proper elections at the right time means they are lost forever.
Furthermore, family law practitioners must be conscious that this is a tax-related matter which often falls outside their usual area of expertise. Liaising with property tax consultants and accountants is essential. Moreover, judges are likely to expect substantiated financial schedules when making decisions on division; a robust capital allowances breakdown could influence final court calculations or incentivise settlement outside of court.
Negotiation Strategies Involving Capital Allowances
Given the importance and value of capital allowances, strategic negotiation around them can enhance settlement outcomes. This may involve agreeing that one party retains the property along with the tax reliefs, in return for a reduced share of other assets. Alternatively, the parties might choose to sell the property, split proceeds and consequently disregard the future tax impact altogether.
In more sophisticated negotiations, an understanding of capital allowances could offer a powerful bargaining tool. For example, if one spouse has no use for capital allowances due to their personal tax situation or lack of business income, but the other party stands to gain significantly, agreeing to pass over the rights to the allowances in exchange for a lump-sum payment or reduced alimony could be a strategic move.
One must be cautious about seeking to apportion allowances post-transaction. While spouses may reach informal agreements during settlement talks, unless these are properly enshrined within the legal transfer documentation and relevant elections submitted, they cannot be enforced through HMRC mechanisms. Lightly papered agreements may unravel, causing disputes or lost tax opportunities in the future.
Challenges Facing the Court When Capital Allowances Are Involved
In a courtroom setting, especially where a judge needs to decide on asset division without complete mutual agreement, the complexity of capital allowances can become a barrier to clarity. Judges, although well-versed in family law, are unlikely to be capital allowances experts. This reinforces the need for specialist reports and, where applicable, expert witness testimony to clarify the value and implications of these allowances.
Where little documentation exists or where allowances were unknowingly forfeited due to prior transactions (e.g., sales without proper elections), the court may acknowledge this as a loss or missed asset, similar to a failed investment. However, without accurate valuations, it can be difficult for the judge to apportion value or award compensation.
This illustrates a wider issue in family law, where tax-specific assets and reliefs can become a grey area. The solution lies in early identification of all potential tax-relieving structures and engaging the right professionals from the outset to support negotiations — not just once legal proceedings have advanced or reached impasse.
Emerging Trends and Legislative Considerations
Capital allowances have evolved considerably in recent years. The introduction of the Structures and Buildings Allowance (SBA), for example, adds another dimension. While different from the traditional plant and machinery reliefs, the SBA allows tax relief on qualifying construction expenditure over several decades. This too must be documented meticulously and could become part of divorce settlements as commercial property owners claim SBA moving forward.
Looking ahead, capital allowance regimes are subject to change depending on government policy and economic strategy. This fluidity affords both risk and opportunity. Divorcees and their advisers should not only be guided by current tax reliefs but also retain flexibility to accommodate future changes that may enhance or reduce the value of the asset post-settlement.
Conclusion
In closing, the intersection of divorce and capital allowances on commercial properties reveals a nuanced and often overlooked area of family law and tax planning. These tax reliefs, while invisible to the untrained eye, can carry significant financial weight and directly influence the fairness of asset distribution.
As with all complex financial assets, awareness and foresight are key. Each party involved in a divorce that features commercial property should ensure that potential capital allowances are identified, valued and appropriately transferred where necessary. Engaging tax specialists, ensuring timely elections, and integrating these allowances into broader financial negotiations will ensure that both legal equity and fiscal prudence are preserved.
The ending of a marriage is seldom simple, but with careful handling and professional input, it is possible to navigate this difficult time while safeguarding long-term financial security. For those with commercial property interests, capital allowances may act not just as tax relief but as a lifeline of future stability — one worth protecting in even the stormiest of separations.