Hotel & apartments

Why Did Six Forward Get Involved?

The client was a developer; this particular project concerned the construction of a 235-room hotel and 19 story apartment block with social housing followed by lease of the apartments to a lessor and a lessee.

We were asked by the accountant to advise their client who had made £97.85m expenditure on this mixed-use project. The main contractor left mid-project but there was some reasonable information provided for us to review. There was a total of c.£60m of expenditure made over a 4-year span.

Company A held a freehold interest in the land but leases were granted to Company B and subleases to Company C involved in the transaction so the client was concerned if they could claim for capital allowances on the development and on the leasehold improvements made.

Although capital allowances claims for hotels are common, because of the complexity of the case and the fact that three separate connected entities were involved and the transfer of assets between connected parties for capital allowances is very complex the accountant and client were unsure about claiming capital allowances so decided to seek advice from a capital allowances specialist.

How Did We Help?

The Social housing element was sold-off and the transaction failed to address FA 2012 requirements and the capital allowances claim for this part was lost to the client. ‘Company A’ had entitlement to make a significant capital allowances plant and machinery claim on the hotel and apartments as they had a qualifying activity.

Of the c.£98m spent and the c.£63m analysed a plant and machinery allowances claim was made against c.£40m of qualifying expenditure for the hotel with the apartments leased to a connected party (Company B) who also sub-leased to another connected party (Company C).

This was a very complex case but by undertaking due diligence, reviewing purchase and lease contracts and fully understanding the legislation and the relationships between the connected parties we were able to provide certainty to the accountant and client and reduce any perceived risk of making a capital allowances claim.

What Was the Outcome?

WHAT HAPPENED FOR THE FREEHOLDER?

Company A granted a 999-year lease for the apartments to connected Company B for a premium of £60m.

WHAT HAPPENED FOR THE LEASEHOLDER(S)?

Company B could not claim due to having no qualifying activity. Company B granted a sub-lease to further connected party Company C for £60m, who were able to claim under CAA 2001 s.184.

Company C now holds the interest and is first owner of the fixtures and fittings for capital allowances purposes.

WHAT HAPPENED FOR THE SUB-LEASEHOLDER?

Company C were able to claim because they had qualifying activity, had made qualifying expenditure and held relevant interest in the land. This resulted in £4.8m of allowances against the capital allowances on fixtures and fittings in the communal areas of the residential apartments.

Relevant Legislation For This Case

Capital Allowances Act 2001 ss. 11, 15, 35, 173, 175, 176, 181, 183, 184, 187A, 198, 199 and 201