Capital allowances and contaminated land can have a significant impact on the financial viability of student accommodation projects. Lovell Consulting are actively involved in several student accommodation 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 student accommodation 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 student accommodation 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. Plant and machinery within student rooms is excluded.
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 student accommodation the most likely items are low energy light fittings and combined heat and power systems.
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 student accommodation 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.
An office building is purchased for £20m and converted to student accommodation. 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.
To discuss student accommodation and capital allowances implications please call 020 7329 1300