Fiducia Wealth Management
Posted in Inheritance Tax, BPRA on 14.02.13

Marcus Honig of Napier Capital Management Ltd

BPRA was introduced by the Finance Act 2005 and was launched on 11 April 2007. It provides an incentive to bring unused or derelict properties back into use.

A BPRA investment scheme gives initial allowances of 100% on expenditure incurred on converting and renovating unused business premises in disadvantaged areas. A BPRA investment can provide valuable relief and may be worth considering for individuals with significant taxable income.

BPRA was originally intended to be available for a 5 y ear period (to expire on 11 April 2012). However, it was announced in the March 2011 budget that BPRA would be extended for a further 5 years (to April 2017).

The Assisted Areas Order 2007 (SI2007/107) confirmed the ‘development areas’ in the UK which are eligible for BPRA.

In order to claim BPRA:

  • There must be ‘qualifying expenditure’. This is capital expenditure on converting, renovating or repairing qualifying business premises.
  • The ‘qualifying building’ must be a commercial building or structure in a ‘disadvantaged area’ which has been empty for 12 months immediately before the conversion or renovation starts.
  • The last use must not have been as a dwelling and it must remain as a business premise after the renovations have taken place (use as a hotel is usually acceptable and satisfies this condition. Many BPRA investments are for conversion to hotels).

Previous use of buildings in some specific industries is excluded from BPRA (such as coal and steel).

Expenditure on acquiring land, extending a building or developing land next to a building does not qualify for BPRA.

Individuals and companies who incur the capital expenditure, and hold a relevant interest in the building, can claim 100% relief and deduct it from their trading profits for the capital costs mentioned above.

Individual UK-resident investors claiming BPRA can offset the initial relief against their total income tax for that year. Unused relief can be carried forward and set against total income for the following tax year.

Often investors obtain BPRA through investing via a form of trust or special purpose vehicle (SPV). This may be a limited partnership (LP) or limited liability partnership (LLP) depending on the structure used.

Any BPRA claimed may be clawed back if the property is sold, demolished or ceases to be used for qualifying purposes within 7 years after it was first used or available and suitable for letting. As it will take time to complete the initial refurbishment, typically BPRA investments will be retained for at least 8 years.

BPRA Example

This example shows the acquisition of a qualifying property for £2m by “BPRA limited partnership”. “BPRA LP” believes the total refurbishment cost will be £8m, giving a total property cost of £10m. The property will be converted from an office block (un-used for 12 months) to a hotel. The hotel will be operated by an experienced operator on a management contract, immediately after completion.
The LP has secured a limited recourse loan from a bank and negotiated 60% of the total value (i.e. £6m, secured against the property with no recourse on the investors). The LP needs to raise a further £4m in equity. The minimum individual equity investment is £50,000 (grossed up to £125,000, when the debt is in place, which demonstrates the effect of gearing).

Total Purchase Price

Per Unit

Percentage

UNIT VALUE
Minimum Equity Investment

£4,000,000

£50,000

40.0%

Loan Facility per Unit (@60%)

£6,000,000

£75,000

60.0%

Total Unit Value

£10,000,000

£125,000

100.0%

PROPERTY COSTSProperty Purchase Price

£2,000,000

£25,000

20.0%

Refurbishment Costs

£8,000,000

£100,000

80.0%

Total Property Cost

£10,000,000

£125,000

100.0%

Loan Facility

£6,000,000

£75,000

60.0%

Equity Investment

£4,000,000

£50,000

40.0%

BPRA Qualifying Expenditure (@80% of total property costs)

£8,000,000

£100,000

80.0%

Tax Relief (based on 50% tax payer)

£4,000,000

£50,000

40.0%

Net Equity Investment

£0

0

0

At the end of the refurbishment, which we have assumed takes 12 months, the investor (a 50% tax-payer) is eligible for £50,000 in tax relief (per £50k invested). Following the refurbishment, the property immediately starts operating as a hotel and remains operating for the full 7 year term, at which point BPRA LP sells the property. At this time, the outstanding debt has been ammortised from the original £6m down to £4m and the hotel is paying an annual rent of £600k. The table below shows potential exit yields with corresponding investor returns.

Exit Yield (Gross)

6.00%

5.75%

5.50%

5.25%

5.00%

Gross Return

£10,000,000

£10,434,782

£10,909,090

£11,428,571

£12,000,000

Outstanding Debt

£4,000,000

£4,000,000

£4,000,000

£4,000,000

£4,000,000

Net Proceeds

£6,000,000

£6,434,782

£6,909,090

£7,428,571

£8,000,000

Total return per £50k invested (exc. BPRA relief)

£75,000

£80,435

£86,364

£92,857

£100,000

Total return per £50k invested (incl. BPRA relief)

£125,000

£130,435

£136,364

£142,857

£150,000

This financial model is only to be used as an example, and should not be considered a benchmark against which BPRA investments may be assessed.

The views in this article are that of the author’s and do not necessarily reflect those of Fiducia Wealth Management Ltd.

If you would like to know more about how we as Financial Advisers can help you set, plan and achieve your financial goals then financial planning section of  our website: Financial Planning or send us email at: email@fiduciawealth.co.uk

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Fiducia Wealth Management
Posted in Inheritance Tax, BPRA on 14.02.13