Much has been written about tax incentives provided to private hospitals, but how do they work? Conor White of Goodbody Stockbrokers answers the most commonly asked questions
Private hospitals in this country are generally funded by a combination of bank debt, tax equity and promoter equity. The Irish state has decided that it should encourage the provision of private healthcare by allowing certain tax payers reduce their tax bills by using capital allowances.
Tax equity is how investors purchase capital allowances. In Ireland, most schemes, including hospitals’ schemes, only allow investors to offset capital allowances against their rental income tax bill, and not against any other income.
Capital allowances arise when the cost of a certain asset (in this case, a private hospital) is ‘written off’, or offset, against tax. This means that if you owe tax on, for example, €100,000 of your income, you can offset this with capital allowances of the same amount.
h4. Accelerated capital allowance
However, the key issue here is just how long does it take to write off a given asset against tax? In this country, we refer to most tax-based transactions as ‘accelerated capital allowance’ transactions.
This is because the capital allowances can be claimed over seven years (in the case of a hospital or a hotel), whereas the life of the asset is much longer (a hospital can have a life of 50 or even 100 years or more).
This might seem strange to most people. However, governments have been using this type of transaction all over Europe for many years. They do it to incentivise investment in assets that they consider desirable.
Most industries in Europe can offset the cost of machinery against tax in this way. In Germany, for example, the cost of aircraft, locomotives and other equipment can be offset against tax.
In Scandinavian countries such as Sweden and Norway, individuals can offset capital allowances for ships against their tax because their governments wanted to encourage the building of ships.
In the United States, the government decided it wanted to encourage the sale of aircraft and locomotives and therefore they allow certain taxpayers capital allowances for these assets, which they can then offset against their tax.
h4. Analysed by example
The key aspects of the capital allowances regime in Ireland are best analysed by reference to an example. If we say that a private hospital is to cost €100 million, of this, perhaps €90 million will qualify for capital allowances. Then the capital allowances will be available over seven years as follows:
Years one to six @ 15 per cent = €90 million x 15 per cent = €13.5 million per annum capital allowances.
Year seven @ 10 per cent = €90 million x 10 per cent x top tax rate = €9 million capital allowances.
There are very few individuals that would have rental income of €13.5 million. Therefore, capital allowances have nearly always been divided amongst a number of investors. In recent times, however, the Irish Government has limited the use of capital allowances.
In the case of an individual, the maximum allowances that can be offset against rental income (if this is the individual’s only income) is €250,000.
Where an individual has other income, a higher limit applies. In the case of an individual who has Schedule D income of €500,000 and rental income of €500,000, then all of the rental income of €500,000 can be shielded by capital allowances.
The limitation in recent years, does, however, mean that overall the number of investors in a typical transaction has increased quite a lot.
This has given more investors access to this type of investment, rather than it being limited to a very small number of very wealthy individuals.
In the case of an employee in a hospital, for example a doctor, a nurse or another employee, it is worth bearing in mind that they cannot avail of tax allowances for a hospital to which they are ‘connected’.
The term ‘connected’ is very broadly defined in the legislation – but it certainly would cover a situation where the employee has a practice in or the employee is employed by that hospital.
h4. Capital allowances
It is worth bearing in mind that doctors and other employees can avail of capital allowances in hospitals where they are not connected, by way of employment or by having a practice there.
In a typical deal, the value of the capital allowances is shared approximately equally between the developer of the private hospital and the tax payer. This results in an effective tax rate of approximately 23 per cent for the tax payer on their rental income, rather than on their top tax rate.
Now that interest rates are falling again, tax payers who have a number of properties are likely to suffer higher effective tax rates on their rental income. The only way of reducing this tax burden is to buy capital allowances.
h4. Largely phased out
Unfortunately there are relatively few transactions in the market at present, as the capital allowances are largely phased out for hotels and are generally only available for very small deals in crèches and in nursing homes. Because of their size, they cannot bear the cost of a great deal of tax and legal due diligence.
Investors should always take professional advice on the quality of such deals and ensure that they work only with reputable providers.
* This publication has been approved by Goodbody Stockbrokers. The information has been taken from sources we believe to be reliable, we do not guarantee their accuracy or completeness and any such information may be incomplete or condensed. All opinions and estimates constitute best judgement at the time of the publication and are subject to change without notice. The information, tools and material presented in this article are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities.
* Conor White is a Senior Portfolio Manager with Goodbody Stockbrokers.
He can be contacted on 01 6419295 or conor.p.white@goodbody.ie
* Goodbody Stockbrokers is the stockbroking arm of the AIB Group. Goodbody Stockbrokers is regulated by the Financial Regulator and is a member firm of the Irish Stock Exchange and the London Stock Exchange.
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