Tax shelters are still popular despite reductions in income tax rates and a massive decline in the number of schemes available. Many of the reliefs for traditional vehicles - like property - that shelter income from tax have been clawed back.
Although Section 48 - the tax incentive scheme for seaside resort property - is ending soon, developers are still aggressively promoting these properties.
Family Money reader Mr R emailed us concerning this investment. He writes: "The deadline for tax relief is December 31st, 1999 and with guaranteed rental income of between £7,500 and £8,500 (€9,523-€10,793) being offered by the developers/operators these properties are now being advertised as self-funding and may be of interest to other readers."
Some property is available which qualifies for Section 48 relief but it is a less attractive option than in the past. Under this relief, an investor who buys a house in an approved development in a designated seaside resort receives a capital allowance which can be offset against all rental income over a seven to 10 years. Any excess annual allowance can be used to reduce all other income for tax purposes, subject to a limit of £25,000 per year.
It sounds attractive, but investors should be careful about the potential for capital appreciation in these schemes. Some properties available under the Section 48 provision are of poor quality and are being offered at very high prices, according to industry sources. It's important not to let the deadline pressure force a decision that will be regretted later. These properties may do well in the current environment but economic downturns tend to affect rural areas and tourism-related industries sooner than other areas.
If the holiday home is located in a big village of 30-40 developments, it may be wise to stay clear as holiday rental supply may outstrip demand. If it's four or five developments clustered together in a nice location, it may be worth looking into it. It is also important to ensure that the area has the infrastructure to support tourism.
There are no rumours of an extension to the scheme, says a tax adviser. It would be wise for any potential investors to look into the property and ask themselves if it is economically viable or are they just doing it for the tax break. Unfortunately, it may be too late for some investors to take advantage of Section 48 benefits as the end-of-the-year seaside resort deadline only applies if at least 50 per cent of the capital expenditure cost was incurred by June 30th, 1999.
At the moment, one of the most tax-effective investments is a pension plan. Employees can obtain an annual tax deduction on their contributions to occupational pension schemes up to 15 per cent of remuneration. Relief for ordinary annual contributions may be granted through the PAYE system and relief from levies and PRSI is also available.
Despite the deductions, the majority of people elect to contribute much less than the maximum allowable. By contributing just a little more each month, the tax relief may be greatly enhanced. The drawback is that these funds cannot be touched until retirement and aren't as physically accessible as seaside-resort holiday cottages.
More recent potential tax-based property investments include multi-storey car-parks, park-and-ride facilities, student accommodation, child-care facilities and nursing homes where generous capital allowances are available. Section 481 film investments still remain a popular tax shelter although film investors aren't seeing the same returns as a few years ago.
Business Expansion Schemes are not really available since the Government reduced the amount that may be raised by any company to £250,000 from £1 million. Many BES fund promoters left the market when the figure was reduced. Now most BES schemes are only offered through business advisers.
