Author: Julian Lewis
This piece was first published on www.spearswms.com on 22 May 2013.
In this new anti-tax-avoidance era, when so many tax reliefs have been withdrawn, I’ve heard that investing in a Business Property Renovation Allowance scheme is one of the few remaining good opportunities for maxing your tax position. Is it true that you can get up to 100 per cent tax relief on the amount invested? And what exactly are these schemes? How do they work? What are the upsides? Downsides?
We are living at a time when tax planning has become socially unacceptable and where some politicians seem to be unable to distinguish between illegal tax evasion and legal tax avoidance.
In this climate, it is a relief to see one potentially attractive tax allowance come through unscathed from recent criticism. Having been extended for five years in the 2011 Budget, rumour was rife that in the 2013 Budget the Treasury was planning to change business property renovation allowance (BPRA) significantly or even abolish the relief.
However, no changes were made. BPRA is a scheme that offers 100 per cent tax relief on qualifying expenditure incurred to bring back into commercial use buildings that have been empty for over twelve months in depressed areas such as Birmingham, Sheffield, Liverpool and Newcastle-upon-Tyne.
Under typical BPRA investments, when equity is combined with bank debt, once investors have reclaimed the tax relief available, they will either have a very low cost of investment or in some cases, show an immediate profit.
The most common schemes to date have involved a conversion of obsolete offices into branded hotels. Many of these have been structured so as to provide a degree of built-in protection for investors by means of a financial buffer or a guarantee from the developer.
However, it is necessary for investors to hold their investment for at least seven years from the time that the building is brought back into use and for there to be a continuous use of the building throughout that period. If either of these criteria is not met, there is the potential for the claw back of the reliefs that were obtained at the outset.
While BPRA enhanced investments have generally been popular, there remains some uncertainty over the level of tax relief that will be allowed. In many of the investments made over the last three to four years, there has been a trade-off between risk and tax certainty. Those schemes with the greater commercial risks are likely to be subject to less scrutiny than those with less commercial risk.
The good news, however, is that the market leaders in promoting these investments will clearly react to the concerns raised by HMRC and the tax planning aspects of future offerings will almost certainly be more robust.
Julian Lewis, Partner, Fladgate LLP (firstname.lastname@example.org)