Capital Allowances in respect of Private Hospitals

Capital allowances are available in respect of capital expenditure incurred on the construction or refurbishment of buildings used for the purposes of a trade which consists of the operation or management of a qualifying private hospital. A leaflet titled Capital Allowances in Respect of Private Hospitals dated March 2003, which sets out the main conditions of the scheme, can be found on the Revenue website under Income Tax on the Leaflet & Guides section.

The purpose of this article is to:

• Restate that consultants’ rooms and offices are specifically excluded from the definition of “qualifying hospital”,
• Confirm that consultants and certain other categories of persons are not entitled, in any circumstances, to capital allowances in relation to expenditure incurred on any part of a private hospital, and
• Clarify that the unitisation rules and restrictions in relation to the sideways set off of capital allowances apply to investors in private hospital buildings.

Consultants’ rooms and offices

It has been suggested that consultants’ rooms are regarded as part of a qualifying private hospital. This is not the case. Consultants’ rooms and offices are specifically excluded from the definition of a “qualifying hospital” in Section 268(2A) TCA 1997. This exclusion applies even where consultants’ rooms might be used exclusively for the assessment or treatment of patients.

Exclusion of consultants and certain other persons

The legislation provides that a “qualifying hospital” is not regarded as a building to which capital allowances apply as regards a claim by any of the following categories of persons:

• A company
• The trustees of a trust
• An individual involved in the operation or management of the qualifying hospital either as an employee or director or in any other capacity. By virtue of this provision all consultants and other individuals associated with the operation or management of a private hospital - whether employed or self-employed or involved in any other capacity - are excluded from entitlement to capital allowances in relation to expenditure incurred by them on any part of that private hospital building.
• A property developer, where the property developer or a connected person incurred the capital expenditure on the private hospital building. [See page 16 of Tax Briefing Issue 41 (regarding the exclusion of property developers from other schemes) which explains the definition of “property developer” and the tests to be applied].

It should be noted that entitlement to capital allowances is ruled out for these persons irrespective of the manner in which they may hold the relevant interest in relation to any expenditure incurred.

Unitisation Rules

Section 408 TCA 1997 restricts the manner in which capital allowances on buildings may be set off by investors participating in a “property investment scheme”. This is any scheme or arrangement which facilitates the sharing of income or gains from an interest in a building or part of a building by the public or by a section of the public. However, an exception is made for any such scheme or arrangement where the manner of sharing of the income or gains and the number of persons who are involved is in accordance with a practice which commonly prevailed in the State in the 5 year period to January 1991. As indicated in Tax Instruction 12.4.3 (published on the FOI section of the Revenue website under Income, Corporation and Capital Gains Tax - Operational Instructions) direct joint ownership was the practice which prevailed in that period and the number of participating investors can be up to thirteen.

Where Section 408 applies, the investors in the scheme are not entitled to have any of the capital allowances in respect of the building concerned set off against non-rental income. Thus, while investors are not denied the benefit of the capital allowances, the allowances are only available against rental income. The Section 408 restrictions apply to property investment schemes involving private hospitals.

Limit on offset of allowances for individual passive investors

If the unitisation rules do not apply, other restrictions still apply in the case of passive investors in private hospitals. Section 409A TCA 1997 imposes a limit of €31,750 on the amount of excess capital allowances which an individual passive investor (e.g. who leases a hospital property to a health service provider) may set against non-rental income in any year. In such a situation, the capital allowances of the year are firstly given against rental income. If they exceed the rental income, a claim can be made to have an amount up to €31,750 of the excess set, firstly, against the investor’s other income and, subsequently, against the income of his or her spouse for the particular year. Any balance remaining can be carried forward to the next year but is only available for set off against rental income.

The €31,750 restriction also applies to a partner in a partnership carrying on a hospital trade where the individual is not an active partner in relation to that trade. An active partner is a partner who works for the greater part of his or her time on the day-to-day management or conduct of the partnership trade. In this situation, the annual limit of €31,750 applies to the amount of excess capital allowances which the individual (passive) partner may claim against income other than that arising to him or her from the partnership trade.

Incorrect claims made

Any consultant or investor who may, mistakenly, have claimed capital allowances in relation to consultants’ rooms or offices should contact their local Revenue District in order to regularise their affairs. Likewise, any category of excluded person who may have claimed capital allowances in error in relation to any part of a private hospital, or any person to whom the provisions of Sections 408 or 409A apply who may have made an incorrect sideways claim, should also notify their local Revenue District. All self corrections will be dealt with in accordance with paragraph 10.5 of the Code of Practice for Revenue Auditors.

Enquiries on this article should be addressed to taxbrief@revenue.ie