409B Income tax: restriction on use of capital allowances on certain hotels, etc

Summary

The purpose of the section is to restrict capital allowances available to individual passive investors in certain hotels and in holiday camps. Subject to transitional provisions, the restrictions generally apply to expenditure incurred after 3 December, 1997 on such buildings including those in tax designated areas. The restrictions do not, however, affect —

• investments made by an individual owner operator of a business or by an individual actively engaged in the operation and management of a business, or
• investments made by individuals including a passive investor in 3 star or better hotels in the counties of Cavan, Donegal, Leitrim, Mayo, Monaghan, Roscommon and Sligo, other than in seaside resorts in those counties, or
• investments made by companies including financial institutions in any of the developments in question.

The measures are therefore essentially aimed at individuals who are lessors of hotels (other than in the 7 counties mentioned) and holiday camps which attract capital allowances whether generally or under various tax incentive schemes.

Passive investors targeted by the section may only set capital allowances against rental income from all sources. Where allowances exceed rental income in any year the balance can be carried forward and set against future rental income.

Details

Definitions

(1) “active partner” has the same meaning as in section 409A;

“specified building” covers hotels and holiday camps except hotels located in certain named counties, other than in seaside resort areas in those counties. It also excludes certain holiday cottages and other self-catering accommodation, allowances in respect of which are already ringfenced;

“partnership trade” and “several trade” are already defined in Part 43.

Ringfence

(2) The section disapplies a provision which allows for the excess of capital allowances over rental income, for example, to be offset against a taxpayer’s other income. The section applies, subject to the transitional provisions, in respect of expenditure incurred by passive investors on certain hotels and on holiday camps on or after 3 December, 1997. Thus, for example, an individual who is a lessor of a hotel outside one of the 7 counties specified can only set capital allowances in respect of expenditure incurred on the hotel against rental income.

Anti-avoidance

(3) The section anticipates that individuals affected by the restriction in the set-off of allowances might claim to be involved in a trading partnership. In this way they could use excess capital allowances to create or augment trading losses and thus circumvent the restricting measure. To guard against this, the section provides that unless an individual is an active partner, working for the greater part of his or her time in the day-to-day conduct of the trade, the allowances cannot be used to create or augment a trading loss.

Transitional measures

(4) & (5) The ringfencing of allowances under the section does not apply where foundations were laid, or, in the case of a refurbishment project, where 5 per cent of the cost of the project was incurred, before 3 December, 1997. The restrictions do not also apply where —

• an application for planning permission was received by a planning authority before 3 December, 1997 or where a person can show that plans had been prepared and detailed discussions had taken place with a planning authority before that date and that the planning authority can give an affidavit or statutory declaration to that effect, and
• the expenditure on the project is incurred under a contract concluded before 3 December, 1997 by the person entitled to the capital allowances or, alternatively, under a contract concluded before 1 May, 1998 where that person can show that he or she had made preliminary commitments or agreements in writing in relation to the project before 3 December, 1997.

Death of investor

(6) There is provision to allow transitional treatment for expenditure incurred by a new investor to a project where an original investor, who had already contracted to invest in the project, dies. The new investor must give a written commitment to honour the obligations of the deceased investor in relation to the project.

Application to professions

(7) The provisions of the section which are set in the context of a trade are specifically extended to cover professions as well.

Relevant Date: Finance Act 2021