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.
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.
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.
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's 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' 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.