Care Homes, 'Golden Brick' and 'Turnkeys': Unlocking the Differences (Part 1)

Once a suitable site has been identified, a couple of years can pass before a new care home is ready to open. Many care operators (buyers) looking to open new homes get involved in new projects shortly after outline planning permission has been obtained.

Typically, the care operator will exchange a contract to purchase the new home on practical completion to an agreed specification - the so called 'turnkey' route, as all the care operator needs to do is 'turn the key' and the care home is ready to open.

A popular alternative is to use a 'golden brick' structure.  Under this type of structure:

• The care operator will purchase the part completed care home as soon as the 'golden brick' has been laid.
• In practice, this usually means the first course of bricks above the foundation (i.e. building is now above ground).
• After the purchase, the rest of the care home is constructed under a separate development agreement.

The key advantage of using a golden brick structure is to benefit from a stamp duty land tax (SDLT) saving.  To expand:

• On the purchase of a fully completed care home, SDLT will be payable on the purchase price for the completed building.
• Under a golden brick structure (provided that various detailed tax conditions are met), SDLT should only be payable on the value at the point of transfer (i.e. when the golden brick course is laid).  This value would comprise the land value plus the value of works to lay the foundations and the golden brick course, so there should be a substantial SDLT saving.
• If the land sale (at golden brick stage) and the subsequent development agreement are so inextricably linked that they form essentially parts of the same bargain, HMRC will argue that SDLT should be payable on the full cost (rather than the golden brick value).  However, HMRC do accept that it is possible for two agreements between the same parties to be sufficiently separate.  Therefore, detailed tax advice is required to ensure that the arrangements fall within the rules.

So, why is the golden brick layer relevant?  Why not just transfer the land upfront and then start building?  The answer is VAT:

• The landowner is likely to have paid VAT on the purchase of the land.  To recover this VAT, the landowner will charge VAT on its sale of the land.
• Any VAT paid by the care operator will usually not be recoverable, as most care services are exempt for VAT purposes.
• VAT law has recognised this problem - a 'person constructing' a building designed to be used for a 'relevant residential purpose' (which usually includes care homes) is allowed to charge VAT at 0% (zero-rating the sale).  This means that the landowner charges VAT (albeit at 0%) and is able to recover VAT paid by them, whilst the care operator pays VAT, but again at 0% so there is no irrecoverable VAT cost.
• So, where does the 'golden brick' come into the equation?  Longstanding practice is that a person only becomes a 'person constructing' once the building has left the ground.  So, a sale before golden brick level would cause a VAT issue.

Nothing in life is free, and there are of course some disadvantages to a golden brick structure:-

• The land and foundations are purchased upfront, so the care operator loses the ability to refuse to accept the completed care home until all major build issues have been resolved (in this case, the care operator would need to rely on remedies in the development contract).
• To avoid an HMRC challenge that the agreements are part of the same inseparable bargain, the care operator cannot have the right to give the land back if the building is not finished.  If, for example, the developer became insolvent, the care operator would need to find another developer to finish the building.

In the right circumstances, and by ensuring that all necessary tax conditions are met, a golden brick route can offer substantial (and completely HMRC acceptable) SDLT savings without disturbing the favorable VAT treatment available on the construction of care homes.

However, it is important for sellers, developers and operators to understand the commercial compromises in such transactions and to obtain legal and tax advice on choosing a development structure which best suits their business needs and objectives.

This article is Part 1 in a series of 2 and the second article will focus on 'turnkey' development contracts.