100% Tax Relief - Renovation Allowance

Tax breaks are available to those that help to breathe new life into disadvantaged areas by renovating empty business premises. The aim is to help rejuvenate struggling areas and promote urban renewal.

The business premises renovation allowance (BPRA) is designed to provide an incentive to bring derelict or unused business properties back into use. Under the terms of the scheme an initial allowance of 100% is available for qualifying expenditure in a disadvantaged area.

The scheme has been available since 11 April 2007. It was originally due to come to an end on 11 April 2012, but has now been extended for an additional five years, to 11 April 2017.

There are various investment schemes available which seek to utilise this relief, with hotel development proving to be particularly popular.

Disadvantaged areas

Relief is only available under the scheme for renovating or converting unused business premises in a disadvantaged area.  The areas that are disadvantaged areas for this purpose are those specified in the Assisted Areas Order 2007 (SI 2007/107) (seewww.legislation.gov.uk/uksi/2007/107/made),  and the whole of Northern Ireland.

Qualifying expenditure

The BPRA is available in respect of qualifying expenditure. This is capital expenditure on:

• converting a qualifying building into qualifying business premises;

• the renovation of a qualifying building that is, or is to be, qualifying premises, and

• repairs to a qualifying building.

However, the definition of qualifying expenditure does not extend to acquiring land, extending a qualifying building or developing land next to a qualifying building.

Qualifying building

A qualifying building is an unused commercial building or structure, or part of an unused commercial building or structure that has been unused for at least a year before the conversion or renovation began. In addition, the last use must not have been as a dwelling, regardless of whether the property has been unused for a year.

Qualifying business premises

For the purposes of the relief, a building or part of a building counts as qualifying business premises if it is a qualifying building (see above) that is used or is available and suitable for letting for as a commercial building other than a dwelling (such as a house or a flat). A commercial building is one that is used for the purposes of a trade, profession or vocation or as offices.

Certain types of building are specifically excluded from the definition and consequently from the ambit of the relief. The exclusions cover residential property and premises used wholly or partly for carrying out a relevant trade.

These are trades in the following sectors:

• fisheries and aquaculture;

• shipbuilding;

• the coal industry;

• the steel industry;

• synthetic fibres;

• the primary production of certain agricultural products;

• the manufacture or marketing of products which imitate or substitute for milk and milk products.

It is not necessary to restore an entire building to qualify for the relief. The relief is available equally in respect of part buildings. As long as the conditions are met in relation to the part of the building that is restored (i.e. it was unused for at least a year and is converted to qualifying business premises), the relief is given as for whole buildings.

The relief

The relief is given by way of an initial allowance of 100%. This provides immediate write-off for the cost of the renovation or conversion.

The allowance is given in the chargeable period in which the qualifying expenditure is incurred.

It is not necessary to claim the full 100% allowance. Any expenditure which is not written of immediately attracts ‘writing down allowance’ at a rate of 25% on a straight line basis until the costs have been written off in full.

To prevent abuse of the rules, the allowance is clawed back if the building is sold before it is used a qualifying business premises. The initial allowance is also clawed back if the building is not qualifying business premises when it is first used by the person who claimed the allowance or when available for letting.

A balancing adjustment is necessary if a balancing event occurs within seven years of the first use of the building.

The following are balancing events:

• the sale of the building;

• the grant of a long lease out of the relevant interest for a capital sum;

• the ending of a long lease that is the relevant interest without the lessee acquiring the  reversionary interest;

• the death of the person who incurred the qualifying expenditure;

• the demolition or destruction of the qualifying building;

• the qualifying building ceasing to be qualifying business premises.

If the balancing event occurs more than seven years after the first use of the building, there is no balancing adjustment.

The balancing adjustment can be a balancing charge or a balancing allowance and is made on the person who incurred the qualifying expenditure. The balancing adjustment is made in the chargeable period in which the balancing event occurs.

The balancing adjustment is found by comparing the residue of expenditure (basically the amount of expenditure which has not yet been written off) with the proceeds from the balancing event. If the 100% initial allowance has been claimed in full the residue of expenditure is nil.

A balancing charge arises where the proceeds are more than the residue of expenditure. This will be case if the 100% initial allowance has been claimed in full and there are proceeds from the balancing event. The balancing charge is simply the difference between the proceeds and the residue. The balancing allowance is capped at the amount of the initial allowance and any subsequent writing down allowances.

A balancing allowance may arise if the full initial allowance has not been claimed and the proceeds are less than the residue of expenditure. The balancing allowance is the difference between the two.

Case studies

Case study 1

Toby buys a derelict warehouse in a disadvantaged area, which has been empty for five years, and converts it into a hotel. He spends £2 million on the conversion and renovation. He claims 100% BPRA. The hotel opens when the work is complete.

After a year he decides to convert the basement into a health club and spa, spending a further £250,000. He is not able to claim BPRA on the extension.

He keeps the hotel for ten years, after which time he sells it for £5 million. As more than seven years have elapsed since the BPRA was claimed, there is no balancing adjustment.

Case study 2

Olly buys and disused shop in a disadvantaged area which has been empty for two years and converts it into a bistro. He spends £300,000 on the conversion and claims 100% BPRA.

However, he decides against running a bistro and sells the property before it is used as qualifying business premises. The initial allowance of £300,000 is clawed back.

Case study 3

Emily buys a derelict shop and renovates it, converting it into a nail bar. The renovation costs her £100,000. She claims 100% initial allowance.

After four years, she sells the nail bar for £175,000. Costs of sale are £5,000. The sale is a balancing event as it occurs less than seven years after the building is first used.

A balancing charge arises. The residue of sale is nil as the full 100% BPRA has been claimed. The net proceed of the sale are £175,000. However, these exceed the initial allowance claimed, so the balancing charge is capped at £100,000.

Practical Tip

Renovating unused business properties in derelict areas can be tax efficient due to the availability of 100% capital allowances under the BPRA scheme.

This is a sample article from the monthly Property Tax Insider magazine. Go here to get your first free issue of Property Tax Insider.