Balancing Charges and Allowances
A balancing charge or allowances arise where the an industrial property is sold within the write off period (usually 25 years from the date of expenditure). After this period has expired no balancing charge or balancing allowance arises. This is in contrast to the position with plant and machinery.
Balancing charges or allowances may also arise;
- where the building is demolished or destroyed
- where the building permanently ceases to be used as such; if there is a change of use only, there is generally no balancing event other than in exceptional circumstances
- lease of building terminates; this does not apply for the lease term ends but continues either under an option or statutory rights; balancing charges or allowances are postponed;
Where the capital allowances claimed are greater than the difference between the purchase and sale price, a balancing charge is charged in the year of sale. This can lead to significant charge, as unlike the typical case with plant and machinery the sale value may be significant higher than the tax written down value and indeed the original price.
Where the sale price or other proceeds is less than the tax written down value a balancing allowance applies.Certain type of facilities which enjoy the incentive type tax allowances are subject to a balancing event upon a change of use
The balancing charge is referable to the allowances actually granted. The percentage of the sale price or value referable to construction et cetera is determined in accordance with the original apportionment formula for global construction costs and other costs.. Although notional costs apply to write down the tax written down value where the building is not used in a given period, no allowances are granted on them so they are added back in the calculation of the balancing charge.
The purchaser may be able to claim capital allowances limited to the original allowances available. If the building has been used for less than the write down period (usually 25 years) the purchaser obtains allowances based on the original cost of the building of the purchase price, whichever is lower. The allowances are given over the remainder of the write down period.
The purchaser takes the allowances based on the lower of the purchase price or the residue of expenditure. This is the tax written down value plus any balancing charge minus any balancing allowance arising on the sale. This figure is written off over the residue of the tax life. If the premises has not been used for a qualifying use, the tax written down value may be the original value available as capital allowances.
A trade may may cease when it is transferred to another. There may be a balancing charge or allowance by reason of the transfer. Where they are transferred to a successor without a sale they are deemed to be sold at market value. The successor may claim allowances based on this deemed value.
Where the property is transferred to connected persons who are individuals, market value may be applied so that a balancing allowance and balancing charge will be computed accordingly.
Succession to the interest on death or by gift are not generally balancing events. The successor may take the remaining allowances. In the case of fixture and fittings, the parties may elect by joint election to transfer them at the lower of the market value or written down value. The latter effectively means there is no balancing charge or allowance.
Where plant and machinery is transferred to individuals who are connected for the purpose of the trade, an option may be exercised to take them at lower of the written down value or market value.
Where assets qualifying for capital allowances for industrial buildings or as plant and machinery
- are transferred to and from companies or between companies which are connected
- or where the sole or main purpose is obtaining capital allowances,
then market value applies.
Under certain conditions the option to transfer at tax written down value may be available.
Notional industrial buildings allowance
A notional industrial building allowance applies when the building is not in use not fully in use or not fully qualifying in the year concerned. The building value is written down but no allowance is granted.
The notional industrial building allowance will be adjusted in the calculation of the balancing charge, so that there will be no charge where the allowance has not in fact been granted.
The building must be in use in the trade at the end of the relevant basis period. This will usually be the accounting period. If the building is temporarily disused, the allowance is not available for that period provided.
A capital allowance on industrial buildings may offset a balancing charge on a sale or other triggering occasion. Capital allowances may be used to increase a loss for offset against other income or for carry forward. Some types of capital allowances are subject to restrictions.
Restriction on allowances
After 2006, expenditure on certain incentivised buildings, including third level education buildings, holiday camps, registered holiday cottages, third level institutions and qualifying nursing linked residential units were restricted. Expenditure in this transitional period, while allowances were removed, was allowed at 75% and later 50% in 2008 to termination.
There is a range of legislation which have sought to limit the availability of capital allowances to investors. Capital allowances are in effect available to investors, as lessors of buildings where the investor or its predecessor as lessor incurred the expenditure. An enormous amount of development particularly in the hotel sector, and laterally in the sectors mentioned above, took place by way of capital allowance financed investment.
The schemes involved a sale and leaseback of an existing facilities by the owner /operator. Syndicates of high net worth investors organised loans typically on a nonrecourse basis to finance the construction. At the end of the capital allowance period, the property was typically sold back to the owner / investor, for an amount sufficient to clear the balance of the investor’s loan. The rent paid be the operator covered interest and possibly funded part of the capital repurchase.
The arrangements were usually structured so that the benefit of the tax value of the capital allowances to the investors was shared between the operator and investor, thereby creating a lower cost of finance and providing investors with tax write offs / shelter against other income. Unfortunately, the tax reliefs were left in place too long and led to development of far more buildings and facilities, particularly in the hotel market, than was supported by the fundamentals of the markets.
Against Rental Income Only
The most thoroughgoing and general restriction on release seeks to limit rental allowances which may be offset against other income, for persons who are passive investors and not traders. The allowances are ring fenced to the particular trade
Where a company is entitled to an interest, which carries capital allowances by reason of construction expenditure and subsequently an individual becomes entitled, the individual is entitled to allowances only against the rental income of that building and not generally.
The general high income individual restrictions, introduced in 2007, limit the use of certain capital allowances, in particular those relating to hotel keeping, holiday homes, qualifying hospitals, nursing homes, sports clinics, third level education and childcare facilities.
Research & Minerals
Certain expenditure that does not involve the development of buildings or other physical facilities qualifies for capital allowances for various industrial policy and related reasons. Scientific research, in the area of applied science or the payments of sums to approved bodies or Irish universities, to undertake scientific research, is allowed as expense. It need not necessarily relate to the business concerned. The allowance is available against trading income. 100% of the amount spent is allowable.
Capital allowances are permitted on capital expenditure in relation to searching for mineral deposits and obtaining access to them. The allowance is written down over the likely life of the deposits, to a maximum of 20 years. There is an allowance for expenditure on the rehabilitation of certain mines where the expenditure is required under mining legislation on the decommissioning of a mine. The allowance is equal to the amount required to be paid to the fund over the life of the mine. The cumulative amount may not exceed the total sums paid.
Capital expenditure in relation to the purchase of a patent may be claimed as an allowance over 17 years, or the period of patent rights life, if less. There are similar provisions for a balancing allowance and balancing charge in respect of a sale during the relevant period. There are special provisions in relation to charging the excess of proceeds over capital expenditure. It is spread over a number of years. Alternatively, it may be fully charged in the first year by election.
Capital allowances were allowed in respect of certain farming expenditure from 1998 to 2010 . Certain allowances were aimed at measures to incentivise capital expenditure, in order to improve the control of pollution. A 50% allowance is allowed in the first year to a maximum of €50,000 (from 2006) on expenditure on necessary pollution control. The remainder is allowed over the following seven years. The amount in any period cannot exceed the lesser of €50,000 or the residue.
Allowances are available for nutrient management plant in respect of a farm in respect of the necessary capital expenditure on structures, including waste, storage facilities, effluent tanks, dung and manure pits, yard drains, silos, housing for sheep and cattle, soiled water tanks. The above allowances apply.
There are capital allowances on expenditure on purchasing milk quotas in certain cases. Capital allowances are available on the milk quota for qualifying expenditure over seven years. The allowance is allowed against tax on the trade of farming, where the quota is used in the trade. If the quota ends or is sold within the seven year period, a balancing allowance or a balancing charge is made.
Capital allowances on expenditure on ships is available only against trading income from a qualifying shipping trade. There are restrictions on the use of allowances against the leasing and chartering of qualifying ships.
The chartering or leasing of each ship is regarded as distinct trade, limiting the use of capital allowances on the ship to income from that ship. The chartering of a qualifying ship is regarded as a distinct trade.
Expenditure on Buildings
Allowances are available for capital contributions to local authorities for the provision of new water supply infrastructure and process to be used for the treatment of trade effluent.
A landlord may generally claim the buildings allowance provided the property is in use as an industrial building. The landlord must have the so-called relevant interest i.e. the interest of the person who developed the property. This may be as the actual developer or a purchaser from the developer.
Where the tenant ceases to carry on trade such as to cease to qualify the building as an industrial building there is generally no balancing charge or allowance.
Limits on Allowances
Rental income capital allowances are used first against Irish rental income. The amount of may be set off against all income in the year is limited to €31,750. Certain allowances are limited to the income only.
The accelerated capital allowances and property incentive schemes are subject to the high earners restriction and determination provisions.
Special incentivised schemes such as urban town and rural schemes and accelerated allowances are subject to special provisions terminating them when the property is held by passive investors.If the buildings tax life expires before 2015, the unused allowances cease and are not available for carry forward. If the tax life expires in later years the allowances are available only for that year and not later years..
A passive trader is one who does not work the greater part of his time in the management or conduct of the trade.
See the other sections in relation to the higher earners restriction. This restriction limits the extent to which incentive capital allowances and other property incentives can reduce taxable income.
See the other sections in relation to the universal social charge property surcharge. Where a person’s income exceeds €100,000 and he or she has claimed property based incentives or area capital allowances there is a surcharge of 5% in relation to the reliefs.
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