UK: Business Property Renovation Allowances

Last Updated: 4 February 2013
Article by Smith & Williamson


Finance Act 2005 introduced a new capital allowance – Business Property Renovation Allowance (BPRA) which has been effective for expenditure incurred on or after 11 April 2007. BPRA is available for capital expenditure on converting, renovating or repairing and bringing back into use certain commercial buildings or structures that have fallen into disuse. The allowances available (subject to a claim being made) are an initial allowance of up to 100%, with an annual straight line writing down allowance of up to 25% of the qualifying expenditure on any remaining balance. The allowance is only available in certain areas. It was initially available only for a five year period to 10 April 2012, but the Government confirmed at publication of Finance Bill 2011 that the scheme would be extended for a further five years. Therefore in order to claim an allowance under BPRA, the expenditure must be incurred before 11 April 2017. It is available whether or not the person incurring the expenditure is carrying on a trade or property business.

Where the circumstances mean that BPRA could be available, then it may be worth considering the cashflow impact of waiting until a building meets the conditions for a claim for BPRA (for example by waiting until it has been unused for at least 12 months) before incurring the expenditure. In this way it may be possible to obtain 100% relief for expenditure which otherwise might not qualify for allowances (for example if not plant or machinery), or might only qualify for relief at a reduced rate applicable to 'special rate pool' expenditure.

Conditions for claiming BPRA

Allowances are available to a person incurring qualifying expenditure on a qualifying building in which they have a relevant interest.

Qualifying Expenditure

Qualifying expenditure is capital expenditure incurred on or after 11 April 2007 and before 11 April 2017 on the following:

  • converting a qualifying building into qualifying business premises;
  • renovating a qualifying building if it is or will be qualifying business premises;
  • repairing a qualifying building to the extent that such expenditure is incidental to the conversion or renovation described above.

Expenditure cannot qualify if it is incurred in connection with the acquisition of land or rights over land, the extension of a qualifying building (with limited exceptions), the development of land adjacent to or adjoining a qualifying building, or the provision of plant or machinery unless it becomes a fixture. Practice has developed around determining whether repair expenditure is capital or revenue for tax purposes (the accounting treatment is not definitive for tax), and the concepts of 'entirety' and 'nearest modern equivalent' are often referred to. Where repair expenditure otherwise meets the conditions, it is treated as qualifying for BPRA as capital expenditure, provided it would not be allowable as a deduction in computing profits for tax of a property business, or of a trade, profession or vocation. Thus repair expenditure classified as revenue expenditure for tax purposes would not attract BPRA (for example deferred revenue expenditure included in fixed assets in company financial statements and depreciated).

If expenditure has been funded by a relevant grant or payment (i.e. through notified state aid or other payment specified by HM Treasury for the purpose of BPRA), then allowances will not be available in respect of the amount that has been so funded. Demolition costs count towards the net cost of qualifying expenditure. Such demolition costs cannot then be treated as expenditure on the building for any other purpose of the Capital Allowance Act.

Any additional VAT liability incurred in respect of qualifying expenditure qualifies as expenditure to be included in a claim for initial allowance.

Qualifying Building

A qualifying building is a building or structure that:

  • has been unused for at least 12 months, and;
  • was last previously used for the purpose of a trade or as an office (and not a dwelling), and;
  • is located in a 'specified disadvantaged area' (see below) on the date on which conversion or renovation work began.

The above conditions apply to the whole of a building where the expenditure relates to a part of the building, if that part had been used in conjunction with the whole of the building.

Qualifying Business Premises

The expenditure (conversion, renovation or repair) must be incurred to make the property a qualifying business premises. 'Premises' means any building or structure. Qualifying business premises must be used or available and suitable for use for the purpose of a trade, profession or vocation, or as an office or offices.

Premises cannot be used, or be available for use, as a dwelling. Neither can they be used (either wholly or in part) for a relevant trade. Relevant trades are those listed in Commission Regulation (EC) No 1628/2006 and include:

  1. the fisheries and aquaculture sector;
  2. the shipbuilding sector;
  3. the coal industry;
  4. the steel industry;
  5. the synthetic fibres sector;
  6. activities linked to the primary production of agricultural products listed in Annex I to the Treaty;
  7. activities linked to the manufacture and marketing of products which imitate or substitute for milk and milk products, as referred to in Article 3(2) of Regulation (EEC) No 1898/87.

The Specified Disadvantaged Areas

The areas where buildings must be located in order to attract the allowance are set out in SI 2007/107 ( and SI 2001/945 Examples of the areas (amongst others) include certain areas located around:

  • Swansea
  • Durham
  • Newcastle and North Tyneside
  • Sheffield
  • Liverpool
  • Birmingham
  • Coventry
  • Newport
  • Glasgow
  • Northern Ireland

The Relevant Interest

The relevant interest in a qualifying business is one to which the person who incurred the expenditure is entitled. Where a person owns more than one interest, and there is an interest which is reversionary to the others, that is the relevant interest. An interest does not cease merely because of the creation of a lease or other interest to which that interest is subject. A person who incurs qualifying expenditure and is entitled to an interest on completion of the conversion is treated as having an interest when the expenditure was incurred.

Claw Back of Allowances on Balancing Events and Associated Proceeds

There is a system of balancing allowances and charges on the occurrence of a balancing event in certain circumstances.

Balancing events (and associated proceeds) are:

  • Sale of the relevant interest (in which case the proceeds are the net sale proceeds);
  • Grant of a long lease for a capital sum (proceeds in this case will be the greater of (a) the capital sum paid for the grant of the lease and (b) the commercial premium);
  • Ending of a lease that is a relevant interest without the lessee acquiring the reversionary interest in it (if there is a connection between landlord and tenant, the proceeds will be the market value of the relevant interest at disposal);
  • Death of the person who incurred the qualifying expenditure (proceeds will be the residue of qualifying expenditure just before death);
  • Demolition or destruction of the qualifying building (proceeds will be any net amount received as a result of demolition, whether from scrap, insurance proceeds, or any other capital compensation). If there are net costs of demolition, these are added to the qualifying expenditure immediately before demolition;
  • Qualifying building ceasing to be a qualifying business premises (proceeds will be the market value of the relevant interest at cessation);
  • The receipt of VAT rebates in certain circumstances.

No balancing adjustment is made, however, if:

  1. the balancing event occurs more than seven years after the time when the premises were first used or suitable for letting for a trade, profession or vocation or as offices, or;
  2. there has already been one balancing event.

Balancing charges cannot exceed the amount of any initial allowance and any subsequent writing down allowance. Where proceeds obtained for a relevant interest are partly attributable to assets that qualify for BPRA and partly to those which do not, then there is a just and reasonable apportionment.

Additional VAT rebates received in relation to qualifying expenditure, are treated as balancing events, but this cannot result in a balancing allowance (for example if the rebate is less than the residue of qualifying expenditure). Where the VAT rebate is greater than the balance of qualifying expenditure, or there is no balance of expenditure, then there is a balancing charge equal to the difference, or the rebate if there is no balance of expenditure.

There are particular rules around the termination of a lease where the claimant of BPRA is a lessee:

  • Where the lease expires and the tenant continues to occupy the building (without a new lease), this is treated as a continuation of the old lease;
  • Where there is an option to renew an expiring lease, and this is exercised, the new lease is treated as a continuation of the old;
  • If the landlord pays an amount to the tenant to terminate the lease, the lease is treated as having been terminated for the sum paid;
  • If another lease is granted to a different lessee and in connection a payment is made to the outgoing tenant, the two leases are treated as the same lease, but as assigned by the initial tenant to the new tenant for the sum agreed.

Circumstances when the allowances will not be available

An initial allowance can be withdrawn if the relevant interest in the premises is sold before it is first used or first available for letting for the purposes of a trade, profession or vocation or use as offices.

Writing down allowances will not be available if the person claiming the allowance has granted a long lease (one exceeding 50 years) for a capital sum.

Tax implications for businesses and investors

There is no qualifying activity condition required for the person claiming BPRA, though any BPRA must be separately identified as a Business Premises Renovation Allowance on the tax return in which it is claimed. Where the person entitled to the allowance is not carrying on a trade in relation to the property and does not carry on a property business, qualifying expenditure and any balancing charges are to be treated as expenses and charges of a virtual property business carried on by them (and therefore Schedule A or property business amounts).

Tax relief and Loss relief for individuals

Any BPRA allowance or charge is treated as an expense or charge of the trade, profession or vocation, or an expense or charge of a property business. If the BPRA generates a loss, however, it is appropriate to consider how relief can be obtained under the two headings of 'trade loss relief' and 'property loss relief'. The proposed cap on income tax reliefs applicable from April 2013 (see NTBN247) will not apply to a claim for relief arising from BPRA.

Trade Loss Relief

Trade loss relief may be claimed against:

  • general income of the same year or the previous year, or
  • against net income of the first four years of trade, or
  • by carry forward against future trading profits, or
  • if a claim is made for relief against general income and there is a balance of loss remaining unused, against capital gains.

While there is no restriction on loss relief due to the initial allowance (it is not a 'first year allowance'), there is a restriction to a maximum of £25,000 for 'non-active partners' (someone who does not personally spend at least 10 hours a week engaged in activities for the purpose of the trade) and limited partners (a partner in a partnership under the Partnership Act 1907). The £25,000 loss relief restriction now also applies to individuals carrying on the trade on their own account as well as to partners (FA2008 s60 & Sch21), but only for any loss made in 2007/08 onwards where the basis period ends after 12 March 2008. In this latter case where the basis period starts before 12 March 2008 and ends on or after that date, then the loss (before capital allowances) is apportioned around that date, with capital expenditure being apportioned to the transitional period on a just and reasonable basis for the purpose of working out capital allowances. It is only the loss relating to the period after 12 March 2008 which is restricted.

Property Loss Relief

Property loss relief may be claimed against general income of the year of loss or the following year. Here loss relief would be restricted to the lower of the amount of the loss and the capital allowances included in the calculation of that loss. Any unused loss would be carried forward for use against future profits of the property business. Under this form of loss relief there is no £25,000 restriction as there is for trade losses, whether the business is carried on by an individual or in partnership.

Tax relief and Loss relief for Corporates

Tax relief operates in a similar way to that for individuals. If the BPRA expenditure generates a loss, relief within the company is dealt with as follows (this note does not consider terminal loss relief).

If the loss is a in respect of a trade, then it can be relieved against other profits of the same accounting period. If the trade was being carried on in the previous period, the company can alternatively make a claim to carry the loss back against any profits of the 12 months preceding the accounting period of the loss. Any trade loss not so used is carried forward and used against the first available future profits from the same trade.

If the loss is in respect of a property business, then it can be relieved firstly against the company's total profits for the same period. Any surplus is carried forward and treated as a property loss of the next accounting period.

If the loss represents excess management expenses in respect of an investment business, then it can be relieved and is treated in the same way as a property loss described above.

Group relief is available where there is at least a 75% interest between the claimant and the surrendering company and the claimant company is resident in the UK. Where the required relationship is satisfied, then losses of the accounting period may be surrendered to be used against profits of a corresponding accounting period. For the purposes of group relief, surplus property losses and management expenses brought forward from a previous period and treated as incurred in the next period cannot be group relieved.

Consortium relief is available for a proportionate interest of the loss making company (where surrendering and claimant company are UK resident, or non-UK resident but carrying on a trade in the UK through a permanent establishment) where there is:

  • a trading company owned by a consortium which is not a 75% subsidiary of any company, or;
  • a trading company which is at least a 90% subsidiary of a holding company which is owned by a consortium and which is not a 75% subsidiary of any company other than the holding company, or;
  • a holding company owned by a consortium and which is not a 75% subsidiary of any company.

Thus where a property business is being carried on by a consortium company it cannot be group relieved, as a Schedule A business is not a trade.

A consortium exists where at least 75% of the ordinary share capital is owned (or beneficially owned) by companies each holding at least 5% of that share capital. Group and Consortium relief take precedence over any claim to carry back losses from a subsequent accounting period.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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