Commercial buildings constructed after 1 April 2020 are eligible for a structural buildings allowance (SBA) of 3% straight line each year. The tax life of the building is fixed at 33 and a third years.
The SBA is available on the building cost and cannot be claimed on the legal costs of the cost of land. The SBA is available as long as it is used for trading purposes. The SBA can also be claimed if the building is let out and used in generating business rental profits.
SBAs are not available on residential buildings.
Apple Ltd buys a building for £150,000 which includes £45,000 land and £5,000 legal costs. The building was used for trading purposes for 6 months in the accounting period.
Apple Ltd can claim SBA of £100,000 x 3% x 6/12 = £1,500.
When the building is sold at a profit, the SBAs are clawed back by adding them to the sale proceeds and this would increase the capital gain accordingly.
Apple uses the building for a further 3 years and then sells it to Banana Ltd for £250,000.
Apple would have claimed SBAs of £100,000 x3% x 3years =£9,000 +£1,500= £10,500 which would be added to the capital gain.
The capital gain is £250,000-£150,000= £100,000 plus the SBAs claimed of £10,500= £110,500.
Banana Ltd would claim SBAs based on the original cost of £100,000 x 3% =£3,000 based on the remaining tax life.
The new buyer would claim SBAs based on the original cost and the remaining tax life. 33.3-3.5= 29.8 years.
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