Private Rented Sector (PRS) & Capital Allowances
Capital allowances and contaminated land can have a significant impact on the financial viability of PRS projects. Lovell Consulting are actively involved in several PRS projects. This note sets out the key capital allowances planning points.
Site Acquisitions potential tax allowances
Where a site is purchased with existing buildings may contain plant and machinery such as heating and lighting. It may be possible to allocate part of the price paid to plant. Careful consideration needs to be given ideally well in advance of the purchase. For sites already owned it can still be reviewing. For instance, on a site purchased for £10m, there could be a capital allowances tax shelter of up to £3m. This tax relief only applies to investors but includes both UK and offshore based investors.
Decontamination Expenditure 150% tax allowances
As there are few green field sites available PRS can involve cleaning up existing sites or converting existing properties. 150% tax relief is available for removing contaminants such as asbestos, Japanese knotweed or pollutants.
This specific tax relief is only available to UK companies that are incurring the expenditure. This tax relief applies to both investors and developers but does not apply to individuals or offshore investors.
For a site which has £1m of this type of expenditure, it can create a tax shelter to an investor or occupier of £1.5m. Incidental costs like fees and contractors overheads can also be included which may increase the claim further.
Derelict Land relief 150% tax allowances
Another less well known but equally generous tax relief is where derelict sites are redeveloped. In order to qualify, a site must have been derelict since April 1998. For qualifying sites, generous relief is available on demolishing and preparing the site for redevelopment. Lovell Consulting is currently working on sites that were former power stations and have buried concrete, piles, steelwork along with contaminants. Lovell Consulting is carefully segregating expenditure to identify both derelict land relief and decontamination relief. These particular sites are held by a property developer who will automatically get 100% tax relief on this expenditure as cost of sales. However there is a further 50% tax relief available here to offset against trading profits for any expenditure attributed to derelict land relief. Where sites are held by an investor the full 150% tax relief is available to offset against current or future rental profits.
Business Premises Renovation Allowance (BPRA) 100% tax allowances
For buildings in certain designated areas identified by UK Treasury for regeneration 100% allowances may be available. This applies to property investors, individuals or occupiers. The site needs to have been unused for at least 12 months before construction works commence and needs to be held for 7 years. It does not apply to properties in and around London but is being used to help regenerate certain disadvantaged areas. There is a cap per project of €20m.
Green Plant 100% allowances and conventional plant and machinery allowances
With PRS conventional capital allowances may be claimed for plant and machinery in communal areas such as lifts, fire alarms, lighting, heating and carpets. Allowances can also be claimed for any plant on roofs, basements or external areas such as signage, car lifts.
This will qualify for allowances as general pool plant at 18% reducing balance basis or 8% for integral features.
It is though worth carefully segregating plant to identify any expenditure which may qualify for 100% allowances. This will apply to expenditure which qualifies as part of the Carbon Trust 100% enhanced capital allowances scheme. Within PRS the most likely items are low energy light fittings and combined heat and power systems.
Expenditure within the individual PRS dwellings is excluded from these capital allowances. An exception to this is where the residential areas are let as serviced apartments and depending on the extent of services provided capital allowances may be applicable within the apartments as well as communal areas.
Annual Wear and Tear Allowance 10% annually
Until April 2016 it is possible for furnished PRS to claim 10% of the net rent as a wear and tear allowance for furniture and equipment provided with a furnished residential letting. It has been announced that there will be a Consultation with tax payers to replace the wear and tear allowance with a less generous tax relief likely to be the actual cost of replacing furnishings in residential properties.
Repairs 100% tax relief (depending on accounting treatment)
Where repairs are carried out to existing buildings significant tax relief may be available. This applies to all areas of the property internally and externally. For instance if a car park is resurfaced or the apartments are redecorated. It can also include the full cost of replacing windows. HMRC do insist that where there is a substantial element of improvement then this is excluded. An example of a disallowance would be where a flat roof is replaced with a pitched roof.
This tax relief applies to individuals and property investors.
The timing of the tax relief for repairs expenditure depends how it is treated in the accounts. If the expenditure is expensed then a full 100% year 1 tax deduction is obtained. If the expenditure is capitalised and depreciated, tax relief is provided at the same rate as accounts depreciation.
At Lovell Consulting we find relatively few PRS properly segregate expenditure and frequently disallow too much expenditure. Given that the wear and tear allowance is being scrapped careful analysis of ongoing lifecycle expenditure is essential.
Case Study
An office building is purchased for £20m and converted to PRS. Part of the site was contaminated by a previous owner and decontamination takes place. The property is refurbished for £10m.
Allowances are identified by Lovell Consulting of £2m for the plant in the existing building. The refurbishment expenditure is carefully segregated and £0.5m qualifies for 150% decontamination relief and £1m for repairs at 100% tax relief. There is a CHP plant and enhanced 100% capital allowances are identified on £1m. Further allowances are identified for communal plant of £3m. Overall tax relief is obtained on £7.5m. Without careful segregation it is unlikely any allowances would have been identified by the client or their tax advisors.
Potential Impact of Summer Budget 2015
The impact of the recent budget is likely to be modest for PRS. This is because large scale PRS is incurred by either UK companies or offshore investors. As these are subject to tax at 20% they will still be entitled to interest deduction as previously.
The budget main impact will be on small scale PRS where it has been owned in personal entities. The restriction to 20% tax relief compared to 45% will have an impact, particularly if interest rates increase.
The loss of the 10% annual wear and tear allowance from April 2016 will be quite costly for furnished PRS and it is understood will be restricted to just the actual cost of carrying out repairs. This will be less generous than the 10% which has been a good shelter. It highlights that it will be more important to carefully consider the other tax reliefs available.
To discuss PRS and capital allowances implications contact us on 0207 329 1300.