Real estate partner John Downs in the hotels and leisure team at national law firm Gateley plc explores the transformational trend of turning offices into hotels, specifically looking at the property aspects and potential tax incentive benefits.
In March there were 2.9 million visits to the UK from overseas residents* and so it’s safe to say that the leisure and tourism industry is stronger than ever, and that’s not to mention UK residents who are exploring their home country for both work and leisure. Considering this, there is a need for hotels in UK towns and cities and an office conversion is a good place to start.
Conversions have long existed in the property world and renovating offices into hotels is definitely a step in the right direction, the ‘upcycling of buildings’ if you like. In the grand scheme of property development, the bare bones of the building are already there and quite often a lot of the other important aspects of the infrastructure already exist too. There may be fewer planning considerations and the existing footprint can be modified, as well as existing surveys and other reports being readily available.
Although the complexities and consequently the cost of redevelopment may in some cases be greater than building from scratch, the benefits of this type of transformation are aplenty; it’s likely that the existing building will be adequately served by infrastructure and vehicular access, transport links are likely to be close by and design limitations are more readily understood, consequently allowing flexibility over room types and sizes.
Notably, the potential tax relief incentives available to investors on the expenditure incurred on these conversions is significant. Capital allowances for example, are a form of tax relief that the Government allows investors to claim against expenditure incurred on a commercial property. The intention of the regime is to encourage investment and stimulate growth by providing tax relief on the expenditure incurred on qualifying plant and machinery inherent in a purchased property or installed as part of a refurbishment or new construction project.
For example, at a corporation tax rate of 19%, the acquisition of an existing in-use office could be worth up to 6.5% of the purchase price in tax relief. Hotel fit-out expenditure is also included, equating to up to 11% of the total cost as tax relief, and the stripping out of offices could be worth up to 6%. For pre-1980 properties, which carry a significant chance that asbestos will be present, the tax relief available for the removal of asbestos equates to 28.5% of the cost of removal and disposal. These low-risk, high-reward savings can relieve pressure on cashflow, ensuring more capital is readily available for reinvestment.
Few investors are utilising these incentives fully at present, but this can be remedied by bringing in a specialist that blends both property surveying and tax capabilities. The ability to value inherent plant and machinery within existing buildings and also correctly interpret construction cost information is key to preparing a valuation report that can be submitted with a tax return to fulfil the requirements of HMRC. Our colleagues at Gateley Capitus specialise in advising businesses in this area and recently prepared a capital allowances analysis on a £6m office to hotel conversion. The total level of allowances identified equated to £3.15m, which translated into a £630,000 saving. Due to the presence of asbestos in the building, a further £100,000 of land remediation relief was also identified, providing an additional £20,000 tax saving in the year of expenditure.
If the opportunity is present, would you consider converting offices into hotels?
Gateley plc has a multi-disciplinary hotels and leisure team of advisers, with many years of experience working with investors, operators and funders in the hotel industry and a thorough understanding of challenges faced by different hotel industry stakeholders.