Tax savings and cashflow from extending a building
With an ever-growing elderly population, the demand for care homes spaces has increased in recent years and will continue to do so. New homes will be built, but many existing homes will have been extended or expanded to meet demand, expectation and regulation.
The capital allowances savings for such can easily be overlooked but can be significant.
There are two important considerations here: plant and machinery allowances, and structures and buildings allowances.
Plant and machinery allowances
These allowances, claimed by nearly all businesses, will be available for an important part of the expenditure on the extension, and it is helpful to split this into two parts.
The claim for new moveable items will be straightforward: beds, tables, chairs, etc. will be shown separately in the accounts (as “plant and machinery” or “fixtures and fittings”) and there will be no difficulty in claiming for these items.
The more valuable claim, however, will be for certain costs shown in the accounts as “additions to property” or perhaps “property improvements”. More care is needed for these items as the correct figure cannot simply be lifted from the accounts.
Example
Bestcare Ltd owns a number of care homes, and decides to extend one of these. The plans are in place and an additional eight rooms are to be added at an overall cost of £1.6 million. A separate amount of £2,000 per room (so £16,000 in total) is spent for moveable items of furniture, including beds, sofas, chairs, freestanding cupboards, chests of drawers, tables; and an additional £30,000 is incurred for other specialist equipment, including hoists, wheelchairs and so on.
The accounts will show £1.6 million as property additions, and £46,000 as fixtures and fittings. The £46,000 can be added immediately to the capital allowances “pool” and tax will be saved accordingly. But what about the £1.6 million?
Plant and machinery allowances cannot be claimed for the whole amount, as the figure includes the costs of foundations, walls, roof, doors, windows, etc., and none of these elements will qualify. However, a substantial part of the cost will be eligible for allowances, including the central heating and any ventilation systems; the entirety of the lighting and other electrical costs; the hot and cold water systems; baths, showers and WCs; any lifts; fire and intruder alarms; phone and calling systems; fitted kitchen equipment, etc.
Care is needed to identify the amount that can be claimed but if it is done properly the claim is completely legitimate and is not in any sense provocative to HMRC. The amount of the claim will vary case by case, but it is quite possible that one third of the £1.6 million will be eligible for tax relief. In many cases, most or all of the tax relief can be given for the year of construction, bringing substantial and immediate tax savings.
Structures and buildings allowances (SBAs)
These allowances are relatively new, in that they cannot apply for any buildings constructed (or, broadly, planned) before late October 2018. For newer buildings, however, they offer additional tax relief for those parts that do not qualify for plant and machinery allowances. The tax relief is less generous, and in this case there is a potential sting in the tail when the property comes to be sold, but they should definitely be considered as part of the overall picture.
Some care homes will qualify for these SBAs but others will not. HMRC guidance makes it clear that they are not given for “general accommodation for persons of old age”. However, they are potentially available for “care home accommodation which provides personal care where the persons occupying are in need of such services”.
In summary
Where a care home extension is planned or underway, capital allowances offer the chance to make substantial tax savings, and should always be built in to the cash flow plans. If an extension has been built in the past, and claims have not been made, it is almost never too late to revisit the position.
