Kingston Smith LLP
Paul is a partner at Kingston Smith LLP, chartered accountants, offering clients a broad range of strategic, commercial and taxation advice. Paul specialises in advising the healthcare sector and was heavily involved in assisting the British Medical Association (BMA) on various aspects of the new contract for GPs. Married with two young children, Paul takes a keen interest in Brighton & Hove Albion FC and is one of the PA announcers at their home matches
Valuable opportunities to claim tax relief are available to anyone investing in practice premises. From loan interest relief, through to capital allowances and business asset taper relief – each can deliver up significant tax savings.
If a loan is used to fund the purchase of any commercial property, including surgery premises, loan interest suffered will qualify for tax relief. The interest should be included either on a personal expense claim or via the practice’s income and expenditure accounts.
Capital allowances (CAs)
CAs are a valuable form of tax relief, available to anyone incurring capital expenditure when buying or building commercial property, including surgery premises. CAs are frequently used by the government as a method of promoting economic policy, both in terms of business investment and environmental awareness.
Depreciation is not an allowable deduction because of the ease with which depreciation rules can be manipulated. CAs provide HM Revenue & Customs with a standard method of deducting capital expenditure from a business’s profits over the life of an asset.
Over the past few years, the rates have changed on a regular basis, and now certain businesses can obtain up to 100% relief for expenditure in the year it is incurred. CAs or related relief for property investments are available when:
- Commercial property is acquired for investment or occupation.
- Commercial new build, extension or fitting-out/refurbishment works are undertaken.
First-year allowances (FYAs)
The rate of CA relief can be more generous in the year the expenditure is incurred than in subsequent years. For the year ending 5 April 2008, FYAs are available as follows:
- 40% if expenditure is incurred by a medium-sized business.
- 50% if expenditure is incurred by a small-sized business.
- 100% if expenditure is incurred on designated energy-saving plant and equipment (such as boilers, refrigeration equipment, lighting and water meters). For further details of the qualifying categories, visit the website for the Enhanced Capital Allowance (ECA) scheme (see Resource).
Writing-down allowances (WDAs)
In subsequent years, or in the first year if the business does not qualify for FYAs, the relief is restricted to 25% on a reducing balance. Note that Gordon Brown’s 2007 budget indicated that this would drop to 20% from 6 April 2008, and a new 100% relief would be introduced for a “capital investment” of up to £50,000 – watch this space!
Plant and machinery generally qualifying for CAs include:
- Central heating/air-conditioning units.
- Chairs and furniture.
- Fridges and freezers.
- Movable partitions.
- Shelving and storage equipment.
- Ventilation, burglar and fire alarm
- Wash basins, sinks, baths, showers and sanitary ware.
A claim for CAs can be significantly restricted by a lack of detailed cost information. It is therefore very important, when planning a new build or a refurbishment, for the quantity surveyor to provide you with a detailed analysis of the elements that will qualify for a CA claim.
The earlier a specialist can be involved, ideally during the initial design stages, the easier it is to compile a short dossier, recording which particular items qualify for allowances. This information can be gleaned from the design brief, architect and project manager, and during actual site visits.
An early involvement will also mean the consideration of new fixed mechanical or electrical equipment (energy efficient), which qualifies for ECAs at 100% in year one.
If you are purchasing a pre-existing building, do ensure that you agree with the vendor the split between land/buildings and plant/machinery. Land and buildings in general do not qualify for CAs, but certainly there is valuable tax relief going begging if the entire transaction is stated as land/buildings and not split out as plant and machinery.
Where a project has been partly funded through a grant or use of savings, adjustments to the computation will need to reflect the amount of the subsidy received.
The resulting tax relief arising from identifying and claiming plant and machinery on the fixed and loose equipment within a surgery, medical centre or diagnostic centre can easily exceed 10% of the capital investment in cash terms.
On average, 35% of the cost of a new build qualifies for CAs. For example, if £500,000 was spent on a new build, then 35% eligible for FYAs = £175,000. FYAs at 50% on £175,000 = £87,500. The tax saving for a higher-rate taxpayer at 40% equates to £35,000 in year one, £8,750 in year two, £6,562 in year three, and so on.
The rules for CAs can be complex. If you think you should have made a CAs claim in years gone by, the good news is that all is not lost. If you still own the property, you can still submit a claim. Do, though, take professional advice.
Business asset taper relief (BATR)
Capital gains tax (CGT) is now a major issue – not just relating to the sale of old premises, but also for retiring partners. Historically, CGT was never perceived as an issue. Primarily because when a partner retired from a practice, there was CGT Retirement Relief, which meant a gain was entirely exempt from any CGT.
Retirement Relief is no longer available, but gains on surgery premises are subject to BATR. The tax relief reduces the level of the gain, but does not wipe it out. It is highly possible that a partner retiring from a practice where the property has increased in value could have a CGT liability to settle.
One of the most complex areas of CGT is assessing the original cost of the surgery premises. This will be different for each partner, depending on when they joined the practice, and the percentage shares in the property will change over the years. Frequently as partnerships grow, new partners buy into the property. This will mean the existing partners will effectively be disposing of a share of their ownership to a new partner.
Where there have been a large number of changes over the years, this will have significant implications for CGT computations, and your accountants should be keeping a detailed and accurate record of how property ownership has changed over the years.
Enhanced Capital Allowances (ECA) scheme