Understanding Balancing Charges
So, what in the world is a balancing charge? It sounds like something from a circus act, right?
A balancing charge is the tax liability that arises when you sell an asset for more than its recorded tax value after claiming Capital Allowances.
It is calculated by comparing the sale price to the Tax Written Down Value. Tax written-down value is the original cost minus any Capital Allowances previously claimed. A simple way of looking at a balancing charge is to think of it as a way of clawing back tax over claimed on an asset at the point when it is sold.
It doesn’t end there…
Just to make things more complicated, other tax reliefs could be hidden under the surface. When calculating a balancing charge, it’s important to consider how the asset has been treated in the tax computations, as well as what tax reliefs (and what type of tax reliefs) have been claimed on the asset to the point of sale.
Setting the record straight
Capital allowances do not always result in a balancing charge
Okay, here’s where things get interesting. Contrary to popular belief, claiming Capital Allowances does not always result in a balancing charge upon asset disposal. In the majority of circumstances, especially because of Annual Investment Allowance (AIA) and Super-deduction, it is generally a balancing charge as the Tax Written Down Value (TWDV) is nil. When you sell an asset that has been subject to capital allowances, you actually may receive a balancing allowance. This allowance is determined by comparing the sale proceeds with the remaining tax written-down value. If the sale price is lower.
An important point
Capital Allowances claimed on embedded items in a building have no effect on the base cost of the property for capital gains tax purposes. Section 41 TCGA specifically provides that it is not necessary to deduct any Capital Allowances from the cost of an asset for capital gains purposes. So, it is not possible for a Capital Allowances claim to create or increase a chargeable gain. Furthermore, claiming Capital Allowances also has no effect on the calculation of any capital gains indexation allowance that may be claimed.
Exploring Scenarios
Selling 'movable' items of plant, machinery and fixtures
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Scenario 1
A simple scenario…
You sell one item of plant and machinery in a single asset pool (assuming that no other allowances such as Annual Investment Allowance (AIA), First Year Allowances, Super-deduction or Full Expensing have been claimed). The tax written down value is £2,000 and you sell the asset for £3,000. The difference of £1,000 is a balancing charge, and you will be subject to tax on that amount. If it was the other way round, the Tax Written Down Value was £3,000 and you sold it for £2,000, then a balancing allowance of £1,000 would arise and that would be allowed against your tax liabilities.
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Scenario 2
A more complex scenario…
What if you close down your business and sell all your plant and machinery and fixtures and fittings? Again, subject to considering any Annual Investment Allowance (AIA), First Year Allowances, Super-deduction or Full Expensing claimed, the result would likely be similar to the example above, you would have a balancing charge if you sell the assets for more than tax was written down value, and a balancing allowance if you sell them for less.
*Note that special rules apply to the scenarios above as a “clawback calculation” if an asset is disposed of upon which Super-deduction, Full Expensing or Special Rate First Year Allowance has been claimed. It is also worth mentioning that Annual Investment Allowance (AIA) cannot be claimed in the year of disposal of an asset.
Selling a Property
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Example 1
A limited company bought a property in the year 2010 and in 2019. Capital Allowance specialists identified a claim of £200,000 as being available on embedded items in the property. These could include items such as lighting systems, heating systems, fire alarm systems, sanitary ware, etc.)
Annual Investment Allowance (AIA), and other first-year allowances are not available, and therefore the costs are subject to the annual writing down rates of 18% for general/main pool items and 6% for special rate pool items. In 2023 the company sell the property, which includes all the embedded items. The company will have the option of keeping all or some of the allowances or passing them over to the new owner of the property via a S198 Election. As the company is continuing in business and elected to retain all capital allowances they will continue to claim at the annual rates of 18% and 6%.
As a result, no Balancing Charge or Balancing Allowance would be triggered.
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Example 2
A limited company bought the property with exactly the same details as above with regard to the cost of the property and the claimable amount of Capital Allowances.
However, this time the Company is ceasing to trade and selling all its assets in 2023.
Up to the date of sale, the Company has only claimed £50,000 of the £200,000 Capital Allowance available. As the Company has ceased to trade the remaining £150,000 allowances can potentially be brought into account as a Balancing Allowance in the tax computation and used against any tax liabilities due in the final tax computations.
As a footnote, if the ltd company was unable to use any balancing allowances to offset tax liabilities and there was no value in carrying back losses under terminal rules, then consideration should be given to transferring the capital allowances to the new property owner via a Section 198 Election. Potentially, those capital allowances could then be used to negotiate a better sale price for the property.
Seeking professional assistance
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