SUMMARY

Enterprise Zone Syndicates (EZS) can provide you, as a professional customer, with the means to mitigate or substantially reduce your current year income tax liability through investment in commercial property in an Enterprise Zone.

Background

Enterprise Zones were established by the Government in 1982, to encourage the regeneration of certain areas. In order to attract private sector investment, tax allowances are granted to Enterprise Zone developments in the form of Industrial Buildings’ Allowances (IBAs). Examples of areas that have benefited from these allowances are London Docklands (including Canary Wharf), Sunderland and Telford.

How an Enterprise Zone Syndicate operates

100% initial allowances may be claimed on qualifying capital expenditure incurred on a qualifying building in an EZ. A qualifying building is an industrial or commercial structure occupied for the purposes of a trade. Current understanding of the legislation is that the valuation given to the land is not qualifying expenditure.

Since 1994, Inland Revenue practice is to disallow part of the expenditure by reference to an ‘apportionment of profit’ formula. It determines the profit as the difference between a deemed cost of construction plus the land ‘value’ and the consideration passing on purchase. The difference is then apportioned between the land ‘value’ and deemed costs of construction. The Inland Revenue disallows the land value plus the “profit” apportioned to the land value.

The qualifying expenditure will vary from property to property but is generally in the region of 75 to 90 percent. By way of an example if you make a total investment of £100,000, and the qualifying expenditure is 90% you could claim relief of £90,000 against your income

The developer who builds the property generally provides a rental guarantee to the Syndicate until a suitable tenant is found (in some cases the buildings are pre-let). The tenant then makes fixed rental payments to the Syndicate. These rental payments are used to pay the interest charge and amortise some of the capital of the loan that the investors have taken out.

An income tax charge arises from these rental payments after deducting the loan interest relief that arises from the borrowed portion of the original investment.

The Syndicate must hold the property for at least seven years in order for the initial tax relief not be clawed back. However after seven years, the Syndicate may sell a lesser interest in the property. The proceeds, after selling costs, are used to redeem any outstanding loan and the remainder is returned to the Syndicate members,

It should however be stressed that these investments have a minimum term of seven years.

Potential Investors should check with their professional advisors as to the suitability of any investments and the tax consequences for their personal situation. The interpretation and application of tax regulations can change and the most up to date position must be checked when considering the appropriateness of any investment.