The following article is provided by Windsor Partners the leading professional indemnity insurance broker.
The Treasury has announced radical changes to tax legislation with effect from April 2012, which will affect all solicitors and others carrying out conveyancing work.
The proposed changes affect capital allowances, ie the mechanism by which purchasers can obtain tax relief for fixtures or other plant in a new or second-hand property. This is often thought of as the domain of accountants, or as something which can be dealt with once a property deal has completed. However with effect from April, this will certainly no longer be the case.
From April, the wrong clause in a contract, or a failure to raise the issues, could lead to the client irrevocably missing out on the tax relief he is entitled to. Every property is different, but the cost to the client would generally be equal to 10% of the purchase price of the property (but can be as much as 25%).
So, a client acquiring a £1 million property could end up paying additional tax of £100,000. Obviously, if he believes this stems from inadequate or incorrect legal advice during the transaction, he is likely to seek compensation. Capital allowances experts are aware of an increasing readiness of property purchasers to take action against their conveyancing advisers for the capital allowances outcome of property transactions. The majority of cases are resolved out of court, frankly indicating recognition by solicitors that they may indeed have been at fault. This will plainly become a more common occurrence under the new legislation.
Details of new legislation
For property transactions completing on or after 1st April 2012 (companies) or 6th April 2012 (individuals or partnerships), the purchaser will only be able to claim capital allowances if he does one of two things.
Either, he must enter into a formal tax election with the seller, or he must take his case to a tax tribunal within two years. Whichever option is chosen, a purchaser will be well advised to commission an expert capital allowances valuation, either for use in the tribunal, or as the basis of negotiations regarding the election. Doing nothing, or choosing a figure at random, is not an option.
Some advisers may think the issue can be easily addressed by making sure the client signs an election at the time of the transaction. However, there is a considerable danger in so doing. It is in a seller’s interests to propose an election in as low an amount as possible, typically £1. This means that the purchaser will be able to claim allowances, but only on £1. Typically, plant (as defined for capital allowances) may equate to 25% of the purchase price. So, on a £500,000 purchase, the value of the plant may be £100,000. If the client is advised to sign the election for £1 without properly understanding the consequences, he may be upset to later discover that he has inadvertently agreed to pay extra tax (to a higher rate taxpayer) of just under £50,000.
Most advisers carrying out conveyancing will not regard themselves as tax experts, and cannot be expected to be intimately familiar with the detailed rules. However, they do have an obligation to ensure their clients understand what they are signing. Indeed HM Revenue has stated that it expects this matter to become a standard aspect of the property sale process.
With effect from April, solicitors will need to ensure that the parties to a property transaction agree that they will, as soon as possible and no later than two years, enter into an election to transfer allowances to the purchaser. The election should be based on a valuation exercise carried out by capital allowances specialists (generally at the purchaser’s expense, unless the value of the allowances is, exceptionally, negotiated to be split between seller and buyer).
Solicitors advising purchasers should furthermore take the lead in advising their clients to obtain specialist capital allowances advice. There are a number of firms claiming to be capital allowances experts, some of whom are little more than call centres. Windsor works only with the leading firm, professionally qualified and with more than twenty years’ experience.