Private investors seeking to back new business ventures, but with more tax relief than venture capital schemes can offer, are being given the opportunity to fund the renovation of old commercial properties and potentially triple their money. However, tax advisers warn that these specialist investments are unregulated – and subject to bank financing, valuation and economic risks.

A small number of advice firms – including Bestinvest, Downing and Invicta – are offering wealthy clients the chance to commit lump sums to property projects utilising Business Premises Renovation Allowances (BPRA) .

BPRA deals enable investors to make use of 100 per cent capital allowances for “qualifying renovation expenditure” on derelict commercial properties, in designated “assisted areas” around the UK. These areas include Cornwall, Wales, and the Shetland and Orkney Islands – but also parts of big cities such as Birmingham, Glasgow, Liverpool and Newcastle. BPRA was established as a statutory tax incentive in 2007 to encourage the regeneration of business locations, and has been extended to 2017.

Investors who buy into a qualifying property and meet the renovation costs can claim tax relief based on the capital allowances at their highest rate of tax – which for those earning more than £150,000 will be 50 per cent.

But they typically make their investment through a limited liability partnership, which arranges bank funding on a “limited recourse” basis – where the debt is only repayable from specific assets and cash flows – to cover around 60 per cent of the purchase price, including the renovation work. That leaves the investors to find 40 per cent of the total.

After renovation, they must make the property available for rental for at least seven years (typically eight years from investment) and the initial tax relief may be withdrawn if the property is disposed of within the seven-year period.

At the end of that time, though, the property may be sold. On disposal, the outstanding part of the bank loan is recovered from the sale proceeds, with any surplus available to the investors. Returns will therefore depend on the saleability of the property, and the taxable rental income generated. If the gross sales price is less than the original gross cost of the property, the returns will be tax-free.

Bestinvest, which is currently offering BPRA schemes to new and existing clients, believes these rules can make BPRA a tax-efficient way for wealthy clients to gain exposure to higher-risk commercial property.

In its typical illustration, a gross investment of £100,000 is made using a £60,000 non-recourse bank loan, with the remaining £40,000 from an investor. Around 20-30 per cent of the total cost will not qualify for capital allowances, but at least £70,000 will – giving a 50 per cent taxpayer an allowance of £35,000 to set against income in the year of investment. Net of this tax relief, the £40,000 investment costs £5,000. Over the next seven years, the investor has to pay tax on rental income, giving a tax bill of £15,000.

However, even if the property is only sold for £80,000 and there is still £20,000 of the bank loan outstanding, that delivers a return of £60,000 on the investor’s net outlay of £20,000.

In this way, BPRA schemes differ greatly from more mainstream asset-backed venture capital trusts (VCTs) and enterprise investment schemes (EISs). VCTs give upfront tax relief at 30 per cent on investments into quoted or unquoted companies that carry out qualifying trading activities, and may or may not own their premises. EISs give tax relief at 40 per cent for investments in early-stage growth companies.

Andrew Clark, tax planning director at Bestinvest, claims that some BPRA schemes can deliver tax refunds in excess of the initial cash investment, while having a similar risk profile to VCTs and EISs.

“We have to consider all of the tax-efficient stuff as high risk, because of the nature of it,” he says. “But we don’t consider BPRA to be materially higher than VCT/EIS, since the investor is likely to be cash-neutral or marginally positive throughout the 8-year holding period, if the project goes to plan. Given that the investor is not ‘playing with his own money’ it is arguable the investments have been significantly de-risked.”

He cites BPRAs deals that can deliver a £52,000 tax rebate on a minimum cash investment of £50,000, and fund the renovation of a prominent building in Glasgow city centre as an upmarket hotel. Other projects include the conversion of industrial warehouses into data centres.

Even so, Clark warns that BPRA schemes carry specific risks, the largest of which is the trading performance of the underlying operating business, or tenant. If it can’t provide income to meet the debt obligations, investors face foreclosure, a forced sale by the lending bank – and a big tax liability.

A £100,000 property investment for £20,000
Illustration of Business Premises Renovation Relief
Gross investment £100,000
Non-recourse loan from bank£60,000
Cash input required £40,000
Tax allowances, assuming 30% of the total property cost does not qualify£70,000
Tax refundable for 50 per cent top-rate taxpayer: 50 per cent on 70 per cent of cost£35,000
Net cash investment after allowing for tax relief £40,000
-£35,000
£5,000
Tax to be paid on net rentals, estimated at 15% of £100,000, over 7 years£15,000
Total cost of ‘investment’ £20,000
Disposal proceeds (estimate) £80,000
Outstanding loan to be repaid (estimate) £-20,000
Cash return£60,000
Source: Bestinvest

Tax specialists also point out that schemes require intensive due diligence. Anthony Yadgaroff, managing director of Allenbridge Tax Shelter Report, says investors need to be sure of a range of factors: the existence of a genuine third-party lending bank, the use of independently verified valuations, and the absence of any financial relationship between promoters, developers, contractors or tenants. “We believe that if it fails any of these factors, it should be avoided,” he says.

Martin Churchill, editor of Tax Efficient Review, warns that investors have to do their homework on the scheme participants, and the tax rules.

He says promoters must be able to prove they have a facility letter from “a recognised credible banking institution”, consents and building contracts, and independent feasibility reports. “Overall, investors should approach with caution a product where I think HM Revenue & Customs will be scrutinising very closely all the items that are covered in the developer agreement, and that drive the level of tax relief for investors.”

Get alerts on Tax when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article