Natasha Spicer – Manager
In the 2018 Budget, the chancellor announced a new Structures and Buildings Allowance (SBA) which will apply to construction costs incurred on certain buildings such as Hotels. As always there are many details within the rules but in essence tax relief will be available where:
- qualifying costs are incurred,
- the property is a qualifying non-residential structure or building,
- the property is used for a qualifying activity,
- the costs are incurred under contracts entered into from 29 October 2018.
This is welcome news as this allowance will result in up-front tax relief, and therefore a cash flow advantage, to hoteliers looking to incur any construction costs whether that be building a new hotel or extending/refurbing an existing hotel.
What has changed?
Previously, any costs incurred on a construction or a refurbishment of a hotel would only have qualified for up-front tax relief through capital allowances to the extent that they related to fixtures and fittings, moveable machinery, integral features etc. The construction costs that related to structural works would not have qualified for any tax relief until the hotel was sold in the future.
The change means that the structural costs will now qualify for tax relief at 3% (updated on 1 April 2020 from 2%) per year and the company is allowed to claim these over a period of 50 years.
After 29 October 2018, Company A carries out a refurbishment of its hotel at a cost of £2,000,000 of which £1,000,000 relates to the structural costs of the building.
Under the previous rules, no tax relief would be available for these structural costs until the time of a future sale.
Under the new rules, the company will be entitled to a deduction from profits of £30,000 per year (£1,000,000 x 3%) for a 50 year period.
Essential H&L Reading
Buying an existing hotel
When buying an existing hotel, as long as the seller has claimed SBA then the purchaser will continue to benefit and can claim the relief over the remaining period up to the 50 years.
If buying a new hotel from a developer SBA will also be available on the element attributable to the structure (i.e. not the land value).
If the purchaser then carries out more construction work, perhaps on another refurbishment or an extension, these costs will also qualify for relief at 3% split over 50 years. A practical point is that these costs need to be accounted for separately to keep track of how long they have left to claim.
Selling a hotel where SBA claimed
Unlike the old industrial buildings allowance on sale of a qualifying building there is no claw back of the SBA’s claimed for the seller.
However, for capital gains purposes, the seller will need to adjust its allowable cost on disposal by any SBA’s that it has claimed.
What should I be doing?
If you are building or refurbishing a hotel, the costs need to be clearly identified. It will still be more tax efficient to make a claim for capital allowances wherever possible as the tax relief is faster, but you will now be able to claim SBA.
If you are acquiring a hotel as part of the acquisition it will be important to understand if the seller has claimed SBA or could have, or to identify what element of a purchase from a developer relates to the building and what to the land.