Why consider Enterprise Zone Syndicates?

Colin French, tax partner at Chancery (UK) LLP, explains why Enterprise Zone Syndicates are proving to be a popular option for investors.

Not many areas are exciting investors in the current climate. However, there is one area proving to be very popular: commercial property. Despite the negativity surrounding the commercial property sector, there is a little- known investment opportunity with some big benefits: Enterprise Zone Syndicates (EZS).

What is an EZS?

Enterprise Zones were introduced in the early 1980s by the Government at the time to promote the regeneration of Brownfield industrial areas in the UK. Docklands is probably the best known Enterprise Zone.

By investing in an Enterprise Zone, your clients will not only make a difference to their own financial situation but also help to regenerate former industrial areas. An EZS consists of a group of individuals who join together to buy commercial property in an Enterprise Zone. Each member has a pro-rata share in the investment.

Why does EZS legislation work for Britain?

The valuable tax benefits are provided by the Government for a number of reasons:

• The Government sees the positive benefits of the regeneration of Brownfield sites.
• The movement of business to an Enterprise Zone creates employment.
• This employment provides the opportunity for further tax revenues to the Exchequer.

Imagine if unemployment benefit payments are reduced, those now employed pay income tax and national insurance, employer’s national insurance is paid on wages, added to which businesses will pay corporation tax, VAT and other duties. This is particularly the case where the new employer has come to the UK as a base. Overall, it is not a bad deal for the Government.

Tax benefits

As well as providing good potential investment returns, EZS investors also enjoy valuable tax benefits. The tax relief to investors is based on 100% initial
capital allowances being available on the cost of the building. The most important benefit to the investor is that it is possible for them to claim income tax relief (at their highest rate) on the proportion of their investment that relates to ‘qualifying expenditure’.

This is based on the proportion of the purchase price that relates to the actual cost of the building. It usually ranges from between 90% and 98% of the gross purchase price. Obviously, the higher it is the better.

Importantly, Enterprise Zone legislation is not aggressive and has been tried and tested over many years. Using this legislation, it is possible for your clients to:

• l Shelter 2009/10 higher-rate taxable income.
• l Plan ahead and shelter 50% taxable income for 2010/11 at a 40% cost now (equivalent to a 25% saving).

Unfortunately, this opportunity will not be available for long. The legislation giving rise to the tax relief will end in April 2011, so it is important to act quickly.

How to fund a typical EZS

In general, an EZS building will be funded through three sources:
a)    Tax money;
b)    A personal equity contribution;
c) Bank debt.

Using the Hamilton International (HFD) 4 Development Syndicate as an example, the figures for a higher-rate taxpayer investing £100,000 would work out as follows:

Gross investment: £100,000
Qualifying expenditure (98.5%): £98,500
Tax relief at 40%: £39,400
Loan (60% of gross investment): £60,000
Investor deposit: £40,000
Effective Net Cost (deposit less tax relief): £600

Areas of analysis

Just like any other investment, you need to analyse an EZS very carefully, before recommending it to your clients. As with any
investment, there are clear facts that are easy to compare between different schemes, and there are other subjective areas to consider, such as:

• Estimated qualifying expenditure;
• Deposit rate;
• Rental guarantee;
• Net cost to investor;
• Type of building (office, data centre);
• Location (it obviously has to be in an Enterprise Zone);
• Tenants (quality and number);
• Provisions to protect investors (developer guarantees and terms);
• Ability to sell (is there a market?);
• General market outlook (property);
• Finance terms (interest, costs and loan);
• The key parties (arranger,

property consultants, bankers or developers);

It is of course very important to do your research. Investing in the wrong EZS could be a costly mistake. However, if you choose carefully and invest in the right EZS everyone will be a winner.

It is also important to note EZS investments should be viewed as medium- to long-term investments. Indeed, they need to run for a minimum period of seven years to retain their tax efficiency.