By ANDREW CLARK 16/06/2010
With the budget due next week, attractive tax shelters such as Enterprise Zone (EZ) property are going to be harder to come by; There is now only one year before these reliefs cease to exist.
One of the drawbacks of EZ properties is that they tend to be situated in sub-prime locations. An alternative to EZ that does not have this disadvantage and is proving to be increasingly popular is the Business Premises Renovation Allowances scheme (BPRA).
What is BPRA and how does it work?
Similar to EZ, 100% BPRAs are given for qualifying costs incurred on a zoned commercial property for a specified period (expiring 11 April 2012). BPRA zones are known as “assisted areas”, usually within major cities such as Glasgow, Birmingham and Manchester.
A property must meet certain criteria to qualify for BPRA, including having been unused for the previous 12 months. Post-renovation it needs to be available for a qualifying commercial use and held by investors for at least 7 years. Only renovation (not acquisition) costs are allowable for tax relief and this generally represents about 70% of gross cost. Given that the cash deposit requirement is usually c50%, an investor’s net cost is c15% (after 50% tax relief) - more expensive than EZ, but BPRA deals may have greater prospect of generating capital gains because these buildings are used in trades, including hotels, which generate recurrent business income streams that may be attractive to prospective purchasers.
However commercial property investments need to be evaluated with respect to a wide range of factors including:
- Property: quality and location.
- Financial strength: developer/ hotel operator (to avoid risk of bank foreclosure).
- Bank finance terms.
- General: room occupancy levels/rates.
Practical Matters
Like EZ, investors form a collective entity (usually a limited partnership (LP), to restrict personal liability). Tax relief is claimed via self-assessment tax return, based upon the investor’s share of the LP results, which will be a loss in the first period (reflecting the contracted cost of renovations). Debt finance is provided to the LP, and is serviced and repaid from the property income. Tax will be due from investors on LP profits (i.e. net rentals) throughout the holding period.
Next Steps
The supply of these deals is limited and may be exhausted before the end of the tax year. Therefore we recommend that you register interest as soon as possible. If you would like to discuss BPRA (or EZ) opportunities please contact either Andrew Clark (020 7184 7905) or your usual adviser.