Author: Julian Lewis
There is little doubt that, despite some promising omens during 2010, times remain tough in the construction industry. Sources of funding are still difficult to come by and, for those with cash available, there do not seem to be too many attractive investment opportunities. There are, however, some interesting possibilities around.
A number of funds and projects have recently sought to take advantage of a tax relief called “Business Premises Renovation Allowance” (BPRA) for expenditure incurred in converting unused business premises into hotels.
These projects have been funded through a mix of cash contributions (on which contributors are able to claim BPRA) and bank debt. BPRA entitles the taxpayer to an initial allowance equal to 100 per cent. of any “qualifying expenditure”. As the current top rate of tax is 50 per cent., this route may enable a taxpayer to shelter income which would otherwise have been taxable at this rate and, as such, HMRC is effectively offering to pay half of the cost of renovating a qualifying building.
BPRA is available in respect of expenditure incurred in converting a qualifying building into a qualifying business premises. Conversion expenditure does not include expenditure incurred on acquiring the building to be converted, extending the building or any development on adjoining land.
Basically, if the building is to be a qualifying building, it must have been used for the purposes of a trade, profession or vocation or as offices, but such use must have ceased and the building remained empty for a period of at least one year immediately prior to conversion. The building must also be situated in a disadvantaged area to qualify. The designation of disadvantaged areas is generous; large parts of England and Wales and Scotland qualify as disadvantaged areas including parts of Newcastle, Greater Manchester, Birmingham and Liverpool.
Qualifying business premises are business premises which are used or, importantly, let for qualifying purposes. A use for a qualifying purpose, which is similar to the use required for a building to be a qualifying building, is use for the purpose of a trade, profession or vocation or otherwise use as an office.
For example, carrying on a hotel business constitutes trading, so the use of a converted building as a hotel will constitute use for a qualifying purpose. Hence, expenditure incurred on converting a disused office into a hotel will qualify for the relief. However, beware – the relief will be denied if the building was last used before renovation as a dwelling, or once renovated it is used as a dwelling.
The relief was introduced on 11 April 2007 for a period of five years, so expenditure must be incurred on or before 10 April 2012 to qualify for relief. In this context the clock is already ticking. If a building is vacated now, the conversion cannot begin for a year (to satisfy the one year unused condition), which does not leave much time for the expenditure to be incurred. If the building is already vacant, the timing will be easier.
Practical use of the relief
After the conversion if, say, a hotel is let by the taxpayer to a hotel operator, BPRA will be treated as arising from a property rental business. As such, it could be set against income arising from the converted building. If (as is likely) the BPRA exceeds that income, it can be offset against other income the taxpayer may have in that tax year. Where the taxpayer would otherwise be taxable at the top rate of 50 per cent., 50 per cent. tax relief is available.
Adam buys a disused building for £30 in a disadvantaged area. He then incurs £70 converting the building into a hotel. Of his £100 expenditure £70 may qualify for BPRA. Adam incurs this expenditure in the tax year 2010/2011. (Adam will be entitled to claim BPRA in anticipation of the qualifying use of the building; if, subsequently, the building is not first used for a qualifying purpose, then BPRA would be withdrawn.)
In 2010/2011 Adam will not, however, earn income from the building because it is still being converted, but he does have a loss for his property letting business of £70 – which is the amount he can claim as BPRA. He will be able to offset this against his income for the tax year 2010/2011. Hence, assuming £70 or more of his income suffers tax at the 50 per cent. tax rate, the relief generated from his expenditure would be £35.
BPRA schemes offer an interesting opportunity to invest in, or raise funds for, construction projects involving qualifying properties. Fladgate is currently advising a number of clients on utilising the BPRA, having previously advised in connection with relevant hotel developments in Birmingham and Liverpool.
Julian Lewis, Corporate Partner (firstname.lastname@example.org)