Care Homes, 'Golden Brick' and 'Turnkeys': Unlocking the Differences (Part 2)

As touched on in Part 1, a typical 'route' for a care operator (buyer) to purchase a new care home is to purchase the home at 'practical completion'. This is the so called 'turnkey' route meaning all the care operator needs to do is 'turn the key' and the care home is open, ready for business.

Under this type of structure, from a tax angle:

• The home is purchased at completion of the build for the full value - Stamp Duty Land Tax (“SDLT”) is therefore payable on the full value of the land and the completed building (meaning that more SDLT is payable than purchasing on a golden brick basis, as discussed in more detail in Part 1).
• The VAT position should be the same as on a golden brick transaction - provided certain detailed VAT conditions are met, VAT on the completed home will be charged at 0% (which is helpful as care operators are generally unable to recover VAT). This involves the operator / purchaser issuing a zero rate certificate confirming that the building will only be used as a care home.

From a tax-savings perspective, the golden brick structure is favourable as it reduces the potential SDLT liability (often considerably). However, there are commercial advantages to purchasing a home through a turnkey route that an operator should consider:

• As the new care home is purchased at practical completion, the operator may be able to 'walk away' from the purchase if the project is not satisfactorily completed depending on the terms of its contract for sale or development agreement. As a result, it may have a higher level of control / negotiating power over any parts of the development which are not built to its satisfaction.
• The operator may not want (or have the relevant development expertise) to be responsible for the land whilst the building is in the process of being constructed. Although, there may be some costs savings to the golden brick basis, the turnkey route allows for a less 'hands on' approach and for the operator to simply receive a building built to an agreed specification and ready to open to residents.

Sounds simple for an operator, right? Not quite. As with most things, the turnkey route requires a lot of negotiation, in this case with developers and contractors. Factors such as building specifications, whether the operator can make variations to the build throughout construction and how much control the operator will have over declaring the building as 'practically complete' will all need to be agreed upfront.

When choosing the right development structure, an operator (as well as developers and contractors) clearly need to weigh up the commercial advantages and disadvantages. In terms of golden brick v turnkey, the main question is whether the potential tax saving outweighs the benefit of simply having to 'turn the key' to open a brand new home.