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Boldly going into enterprise zones

I am a barrister and my income in this tax year will exceed £500,000. I


have used up all my pension allowances and am approaching you for further


tax planning advice. I have heard about enterprise zone property syndicates


from one of my colleagues and I wonder if you could explain them to me.



Enterprise zone property syndicates were introduced in 1983/84. They


enable a group of investors to jointly purchase one or more qualifying


buildings in an enterprise zone.


They have become very popular in the City in recent years because of the


substantial tax breaks available. Here, I will outline the tax position and


some of the risks involved in this type of investment.



Tax allowances


Unlimited tax allowances are available to each investor at their top


marginal rate of tax (see example on right). The qualifying expenditure is


generally the purchase price of the property less the value of the land.



Tax clawbacks


A sale within 25 years of the property first being bought into use would


result in a clawback of the tax allowances received by the investors. This


is known as a balancing charge.


Certain provisions in the Finance Act 1994 also result in a balancing


charge being levied on the sale of a lesser interest in the property in the


first seven years.


After seven years, a lesser interest can be sold without a clawback of


tax. For example, no clawback occurs if the trust owns the freehold and


sells a 999-year lease after seven years.



Income


Interest from borrowings to purchase units may be offset for tax purposes


against rental income received.


Surplus rental income is taxable in the normal way. Similarly, increases


in the value of the property from the original total cost are subject to


capital gains tax.


Higher-rate taxpayers will normally take advantage of a loan to partly


fund the purchase of the property (see example on right). Most syndicates


come with pre-agreed loan arrangements available to the syndicate.



General risks of purchasing enterprise zone properties


When investing in enterprise zone properties, the commerciality of each


project&#39s merits must be considered before looking at the tax benefits. The


normal criteria for property investment apply, that is, location, costs,


strength of tenant covenant, terms of lease and so on.


Enterprise zone property syndicates are unregulated collective investment


schemes suitable only for informed, experienced investors and the


protections of the Financial Services Act 1986 and Investors&#39 Compensation


Scheme do not apply.


Property may have to be held for a long period because of a lack of an


established market in the syndicate interests although the syndicate


holders may sell their property earlier.


Syndicate holders have a direct interest in the properties held in the


syndicate. As such, they may incur liabilities such as the payment of rates


and running costs of the building should the tenant not pay these.


The value of the property and, therefore, the value of interests in the


syndicate can go down as well as up. The property value is likely to be


subject to an initial price distortion as a result of being situated in an


enterprise zone with tax allowances. It may be necessary to pay a higher


price for a property with tax allowances in an enterprise zone than if the


property were situated outside an enterprise zone.

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