Capital Allowances and Property-Based Incentive Schemes

Finance Act Changes

The Finance Act 2006 contains several sections affecting residential reliefs (‘section 23’ type relief and owner-occupier relief) and capital allowances for the property-based incentive schemes. This article provides some details of the new provisions.

Terminating Schemes

A table at the end of the article summarises the Finance Act changes for the terminating schemes.

Termination Dates

Extended termination dates apply to expenditure qualifying for residential reliefs and to expenditure qualifying for capital allowances for certain commercial and industrial developments. The deadline by which qualifying expenditure must be incurred is extended from 31 July 2006 to 31 December 2006 where existing conditions have been met. This new termination date is further extended to 31 July 2008 where additional conditions are met. The schemes affected and the details of the existing and new conditions are set out below.

Residential Schemes Section 23/Owner-occupier	Commercial and Industrial Buildings Capital allowances
Urban Renewal	Urban Renewal
Rural Renewal	Rural Renewal
Town Renewal	Town Renewal
Living over the Shop	Living over the Shop
Park and Ride	Park and Ride
Student Accommodation	Hotels**
General rental refurbishment*	Holiday Camps**
	Registered Holiday Cottages
	Sports Injuries Clinics***
	Multi-Storey Car Parks
	Third-Level Education Buildings
	Nursing Home Residential Units****

*There had previously been no termination date for the general rental refurbishment scheme. The termination date of 31 July 2008 now applies without condition. This is a countrywide scheme for the refurbishment of rented residential properties. Tax relief for qualifying expenditure is given against rental income at the rate of 15% per annum for 6 years and 10% in year 7 rather than by means of ‘section 23’ type relief with a full deduction in year 1. Section 11 Finance Act 2006 introduced a new condition for eligibility for relief by making entitlement to relief dependent on compliance with the registration requirements of the Residential Tenancies Act 2004. (This issue of Tax Briefing contains an article on these registration requirements).

**Capital allowances will continue to be available for hotels and holiday camps that are registered with Fáilte Ireland. However, for those buildings that fall outside the current transitional arrangements the capital allowances will only be available at an annual rate of 4% instead of the ‘accelerated’ rate of 15%.

***There was previously no termination date for incurring qualifying expenditure on sports injuries clinics. The period during which the Health Services Executive is required to provide annual certification in respect of a sports injuries clinic is extended from 7 to 10 years.

**** The original termination date for incurring qualifying expenditure on nursing home residential units was 24 March 2007. Although these units are residential, they qualify for capital allowances as an industrial building rather than for the usual ‘section 23’ type relief for residential developments. A unit will now be treated as a qualifying unit in circumstances where a unit is leased directly to a registered nursing home, provided that it is leased on condition that it is subsequently leased by the registered nursing home to an elderly or infirm person and is not used for other purposes. Previously, the unit did not qualify for capital allowances until it had actually been leased to the elderly or infirm person. See section on Continuing Reliefs for more changes in relation to nursing home residential units.

Existing conditions

Where certain existing conditions are met the termination date is extended from 31 July 2006 to 31 December 2006. For the urban renewal scheme there is a requirement that 15% of the project costs must have been incurred on or before 30 June 2003 and the relevant local authority must have certified this on or before 30 September 2003. For multi-storey car parks there is a requirement that 15% of the project costs must have been incurred on or before 30 September 2003 and the relevant local authority must have certified this on or before 31 December 2003. For buildings used for the purposes of third-level education an application must have been submitted to the Minister for Finance on or before 31 December 2004. For some of the other schemes a valid application for full planning permission must have been lodged on or before 31 December 2004 (see Tax Briefing 60 for details). This latter condition applies to the following buildings or schemes:

• Hotels (‘accelerated’ allowances only)
• Holiday Camps (‘accelerated’ allowances only)
• Registered Holiday Cottages
• Rural Renewal
• Town Renewal
• Living over the Shop
• Park and Ride

Additional conditions

The termination date is further extended to 31 July 2008 where certain additional conditions are met. Work to the value of 15% of the actual construction or refurbishment costs must be carried out on or before 31 December 2006. Unlike the earlier 15% expenditure condition for the urban renewal scheme and multi-storey car parks, the new 15% expenditure condition does not include the acquisition of the site or any costs associated with that acquisition.

For certain commercial and industrial projects, hotels etc. (listed below) where the extended 31 July 2008 deadline requires EU Commission approval, qualifying conditions are more onerous. Thus, a binding written contract for the construction or refurbishment work must be in place by 31 July 2006 and the relevant local authority must certify compliance with the 15% requirement. An application for a local authority certificate must be made on or before 31 January 2007 and the certificate must be issued on or before 30 March 2007. A builder/developer who sells the completed building must provide the certificate to the purchaser. Such certification must include details of the actual expenditure that is incurred up to 31 December 2006 and of the projected expenditure to be incurred after that date. The amount of qualifying expenditure incurred in 2007 and 2008 is then restricted to and cannot exceed this projected amount. That amount is in turn subject to the 75% and 50% restrictions outlined below. Where the projected expenditure is exceeded the qualifying expenditure will be treated as incurred in the period 1 January 2007 to 31 December 2007 to the fullest extent consistent with work having actually been carried out during this period. Projects relating to the following are affected by these requirements:

• Hotels (‘accelerated’ allowances only)
• Holiday Camps (‘accelerated’ allowances only)
• Registered Holiday Cottages
• Urban Renewal (commercial and industrial buildings)
• Rural Renewal (commercial and industrial buildings)
• Town Renewal (commercial and industrial buildings)

Qualifying conditions for the new 31 July 2008 deadline for other cases and for the residential element of the above schemes where E.U. Commission approval is not required are less onerous. However, there is still a requirement for work to the value of 15% of the actual construction or refurbishment costs to have been carried out on or before 31 December 2006. While local authority certification is not required, the person claiming relief must be able to show that this condition has been met. Revenue expects that builders and developers will provide a statement prepared by a quantity surveyor or architect showing clearly the work that was carried out on or before 31 December 2006, the construction or refurbishment costs attributable to this work, the projected construction or refurbishment costs to completion of the project and the percentage of the total figure represented by the work that was carried out on or before 31 December 2006. This statement may be required in the event of an audit by Revenue. Therefore, a builder or developer who sells the completed building should provide this statement to the purchaser who will be claiming the relief together with the usual statement of costs and certificates of compliance/reasonable cost/consistency as appropriate. There is no requirement to have a binding contract in place by 31 July 2006. Neither is there any restriction of relief where the actual expenditure exceeds the projected post-December 2006 expenditure. However, the 75% and 50% restrictions in respect of expenditure incurred in 2007 and 2008, respectively, apply.

75% and 50% Restrictions

There is a gradual reduction in the amount of expenditure qualifying for relief after 31 December 2006. Expenditure incurred during 2006 can qualify in full without restriction. However, only 75% of expenditure incurred in 2007 and 50% of expenditure incurred in the period between 1 January 2008 to 31 July 2008 can qualify for relief. In the case of nursing home residential units, expenditure incurred on or before 24 March 2007 (the original termination date) can qualify in full with expenditure incurred in the period between that date and 31 December 2007 being subject to the 75% cap. For the purposes of determining when expenditure is incurred, only the amount of the expenditure attributable to work actually carried out during a particular period is taken into account. Therefore, it is not possible to circumvent the deadlines by making an advance payment for materials or for work that will be carried out after the deadlines.

Persons claiming relief will need to know how to calculate the amount of relief that is due in respect of their particular property. Revenue expects that builders and developers will provide purchasers with sufficient information for this purpose. Thus, purchasers will need to know the value of the construction or refurbishment work that was carried out on or before 31 December 2006, during 2007 and in the period 1 January 2008 to 31 July 2008. This information may be required in the event of a Revenue audit. It should be noted that it is the amount of the actual construction or refurbishment expenditure, and not the amount of the relief, that is to be reduced by the 75% and/or 50% cap as appropriate. For the purposes of “the net price paid” formula in section 279 TCA 1997, the numerator “C” in the formula (see page 10 of Tax Briefing 60) should be the amount of the expenditure as appropriately reduced.

Continuing Reliefs

The Finance Act 2006 made changes affecting a number of property relief schemes which are not being terminated.

Tax Life and Holding Period

Changes have been made to the tax life and the holding period for balancing allowances and charges purposes in the case of the buildings listed below. These changes apply to such buildings that are first used (or first used after refurbishment) on or after 1 February 2007. The write-off period which is 7 years in the case of the buildings in question remains unchanged. The tax life of a building relates to the period within which allowances claimed on the building may be transferred to a purchaser. This has been increased from 7 to 15 years. Also increased to 15 years is the 10-year holding period within which a clawback of allowances can apply if the building is sold.

• Private hospitals
• Convalescent Homes
• Registered Nursing Homes
• Nursing Home Residential Units
• Buildings used for Childcare Purposes

For private hospitals there is also a change to the period during which the Health Service Executive is required to provide annual certification. It is extended from 7 to 15 years. As part of the certification process, there will now be a requirement to provide data to the Health Service Executive in relation to private hospital buildings in order to facilitate an assessment of the costs and benefits of the scheme. These changes apply to buildings that are first used (or first used after refurbishment) on or after 1 February 2007. For buildings that are in use before that date the period of annual certification is extended from 7 to 10 years. In relation to expenditure incurred on or after 1 January 2006, the definition of a qualifying hospital is amended to include mental health services in the list of services that may be provided in such a hospital.

Balancing charge - change of use etc.

A balancing charge may be imposed where an industrial building ceases altogether to be used within the holding period for the type of building involved. However, the clawback did not apply where a building underwent a change of use. For certain buildings (defined as “relevant facilities”) that are first used (or first used after refurbishment) on or after 1 January 2006 provision is made to claw back allowances where the building in question ceases to be used for the purposes for which the capital allowances were originally granted. However, the new balancing charge provisions will not apply where a building ceases to be used for one type of relevant facility and, within 6 months, begins use as another type of relevant facility. The following buildings are defined as relevant facilities:

• Private hospitals
• Mental Health Centres (see below)
• Convalescent Homes
• Registered Nursing Homes
• Nursing Home Residential Units
• Buildings used for Childcare Purposes

This means that allowances could be clawed back where a private hospital in respect of which allowances had been claimed began trading as a hotel within 15 years of setting up.

New Reliefs

Mental Health Centres

A new scheme of capital allowances, similar to that available for private hospitals, has been introduced for the construction or refurbishment of qualifying mental health centres. The centre must be an “approved centre” for the purposes of the Mental Health Act 2001. To qualify a centre must have the capacity to provide day-patient and out-patient services and accommodation on an overnight basis of at least 20 in-patient beds. The capital allowances regime such as rates, the tax life of the building, the holding period, the annual certification by the Health Service Executive, the data provision requirements, the exclusion of certain categories of investors and the amount of beds to be made available to the Health Service Executive are the same as that available for private hospitals.

Commencement of provisions

Provisions relating to certain buildings and schemes will not come into effect until the Minister for Finance makes a commencement order. These buildings and schemes are as follows:

• Urban Renewal (commercial and industrial)
• Rural Renewal (commercial and industrial)
• Town Renewal (commercial and industrial)
• Living over the Shop (commercial)
• Park and Ride (commercial)
• Hotels
• Holiday Camps
• Registered Holiday Cottages
• Sports Injuries Clinics
• Multi-Storey Car Parks
• Third-Level Education
• Nursing Home Residential Units
• Mental Health Centres

Scheme	Extension to 31/12/2006 Existing conditions	Extension to 31 July 2008		Cap on expenditure 75% 2007-50% 2008	Section
		Work = 15% costs by 31/12/06	Binding contract by 31/7/06		F.A. 2006	TCA 1997
Hotels (‘accelerated’ allowances)	Full and valid planning application by 31/12/04	Local authority to certify	Yes	Yes	26	270/316
					27	268/272/274
Holiday Camps (‘accelerated’ allowances)	Full and valid planning application by 31/12/04	Local authority to certify	Yes	Yes	26	270/316
					27	268/272/274
Registered Holiday Cottages	Full and valid planning application by 31/12/04	Local authority to certify	Yes	Yes	26	270/316
					27	268/272/274
Multi-Storey Car Parks	15% project costs by 30/9/03 - certified by 31/12/03	Architect/quantity surveyor to certify	No	Yes	26	270/316
					29	344
Sports Injury Clinics	No existing conditions No previous termination date	Architect/quantity surveyor to certify	No	Yes	26	270/316
					28	268
Nursing Home Residential Units	No existing conditions	Work = 15% costs not required	No	100% to 24/3/07	26	270/316
				75% 25/3/07 - 31/12/07	37	268
				50% 1/1/08 - 31/7/08
Third Level Educational Buildings	Application to Minister for Finance by 31/12/04	Architect/quantity surveyor to certify	No	Yes	26	270/316
					34	843
Urban Renewal	15% project costs by 30/6/03 - certified by 30/9/03	Local authority to certify commercial/Industrial	For commercial/ industrial only	Yes	25	372AL/372AS
					26	270/316
		Architect/quantity surveyor to certify residential			30	372A/372B/372BA/372C/372D
Rural Renewal	Full and valid planning application by 31/12/04	Local authority to certify commercial/Industrial	For commercial/industrial only	Yes	25	372AL/372AS
					26	270/316
		Architect/quantity surveyor to certify residential			31	372L/372M/372N
Town Renewal	Full and valid planning application by 31/12/04	Local authority to certify commercial/Industrial	For commercial/ industrial only	Yes	25	372AL/372AS
					26	270/316
		Architect/quantity surveyor to certify residential			33	372AA/372AB/372AC/372AD
Living over the Shop	Full and valid planning application by 31/12/04	Architect/quantity surveyor to certify	No	Yes	25	372AL/372AS
					26	270/316
					30	372A/372B/372BA/372C/372D
Park and Ride (including commercial/ residential)	Full and valid planning application by 31/12/04	Architect/quantity surveyor to certify	No	Yes	25	372AL/372AS
					26	270/316
					32	372U/372V/372W
Student Accommodation	Full and valid planning application by 31/12/04	Architect/quantity surveyor to certify	No	Yes	25	372AL/372AS
General rented residential	No existing conditions	Work = 15% costs not required	No	Yes	11	372AM
	No previous termination date				25	372AL/372AS