Investors' benefits add up

The following is an example of the benefits which accrue to an individual who joins a partnership to build a hotel.

Say the individual is responsible for £100,000 (€127,000) of £1 million used to build the hotel. The partners borrow much of the £1 million from the banks.

For each of the first six years the individual can claim 15 per cent of his investment for the purposes of tax allowances. On the seventh he can claim 10 per cent. The total over seven years comes to 100 per cent, or £100,000.

The allowance can be claimed against total income, i.e. income say from work as a barrister or stockbroker. At a tax rate of 44 per cent, this means the individual saves £44,000 over the seven years.

However, he or she makes a further return. In year eight the partners can sell the hotel. If they get £1.5 million and the individual gets £50,000 of this, he or she will pay 20 per cent Capital Gains Tax, or £10,000. This leaves a further profit of £40,000 from the deal, or a total net benefit from the deal of £84,000.

The interest on the bank loan during the years the hotel is owned by the partners can be paid with the profits from the hotel, so no expense accrues in that way. Changes introduced three years ago meant investors could only claim tax allowances against rental income in deals established after December 1997.