Welcome to the December 2022 newsletter from the Independent Care sector broker team at Chandler & Co.
Demand for care homes remained buoyant throughout 2022 with a pause to an extent in some deals crossing the line brought on by market reaction after the September mini budget as some lenders reviewed their appetite for terms.
Interest from the Independent care home operators remained strong when acquiring care homes with multi-site providers in growth phase of their businesses. New entrants to the care home sector tend to have more hurdles to overcome when submitting a finance application with 2023 expected to continue this trend, with specialist care sector support from a broker continuing to add value
The care home sector continues to be favoured upon in many quarters as a growth area with strong demand and unsaturated supply with operators generally seeking to add value to an acquisition, with increased competition for the private residents. The ongoing challenges of staff recruitment and retention, providers have turned to increased agency use or obtained the appropriate licence to recruit from overseas with a variety in experience from operators in different locations across the UK with a widening of marketing techniques used to increase occupancy. An ageing population is making it increasingly likely that demand for care home places will continue its upward trajectory in 2023, with the view taken by many care home operators that they are in the care sector for the ‘long haul.’
What the Chandler & Co. care home Brokers say
“We are in a broadly positive care home sector market despite the economic headwinds, with winter pressures on the NHS demonstrating the need now more that ever before the care sector as a whole is an extremely important sector in communities of today and tomorrow.”
“Lenders in the care market continue to evolve and pivot their offerings, set against the background of geopolitical impact, the cost-of-living crisis and the green journey.”
“As care sector broker specialists, we continue to address the wider lending market in support of client requirements whether this is for the first-time buyer, refinancing a care home, releasing funds to grow through acquisition, refurbishment to maintain a quality care home environment or seeking a green strategy in order to address the pathway to net Zero and reduce the rising cost of living impact on energy costs.”
“Debt service cover as a matrix of EBITDAR is adapting to various levels of lender stress testing. Examples can be a variation in additional stress margins, the impact on EBITDAR sensitivity analysis for wage inflation, energy cost increases, insurance costs and fee occupancy whether private fees and/or local authority backed.”
“No-one is arguing that investment in the social care sector is driven by need now and for the long term as families and friends are increasingly impacted by a care need.”
“Looking back at the clients we have helped source funding in 2022 supports the view that post pandemic, the social care workforce continues to be resilient and committed, with employers in the care sector and primary sectors seeking ways to recruit and retain staff in a competitive environment.”
“Obtaining specialist professional advice for new entrants to the care sector and the multi-site operators is paramount to support a finance application alongside the broker as the transaction reaches pre and post completion”
“In some cases, post September 2022 mini budget, the deal time lengthened with increased due diligence from care home buyers and lenders.”
“Whether buying a care home or selling having up to date management information and timely filed historical financial statements is essential as part of the due diligence process of a transaction”
The purpose of a care home business plan
When submitting a finance application, evidencing your commitment to the care home business in the form of a business plan adds value to the application process to achieve that all important lender credit sanction.
Consider a multi-site growing care home operator:
· The business plan establishes where the company is now
· Where the company wants to be in 3-5 years’ time
· Determines how the company can move from its current position to its desired position.
· Outlining the importance of senior management with the ability to take the care teams along with them and adding value to care home acquisitions.
· The business plan considers a company’s strengths, weaknesses, opportunities, and threats with solutions for skills gaps as appropriate.
· The company’s mission, vision, culture, and ethos are significant factors
· Management and experience in the running of current and acquisitive care homes remain key aspects of a finance application.
· Historical and current management information provide analysis of the financial journey so far with a start point for a forecast and sensitivity analysis.
· The business plan sets the appropriate KPI’s to ensure the care home strategy is developed and measured.
· Cash flow forecasts with sensitivity analysis are an important consideration.
· The business plan covers the quality and age of current care home property, how the care homes can adapt to the rising cost of living, what adaptions are required and whether the current care home locations are sustainable or whether there should be a partial exit plan looking at new or newer care home builds diversifying the care home offering to adapt to a more complex ageing population.
· Consideration is given to the company growing organically using revenue from operational homes in addition to debt funding to fund future developments.
· Location of current and future care homes with competitor benchmarking are key non-financial KPI’s.
· Occupancy of the current and acquiring care homes is a key factor of the finance application with lender underwriter assessment.
· Evidencing successful enquiry management through to a new resident moving in is a key factor with adaptable marketing techniques (Buyacarehome, Ownacarehome, marketing).
Specialist finance brokers experienced in understanding what lenders and their Credit departments are seeking from these documents can often support clients in drafting and editing business plans to ensure they have maximum impact.
Enhance your Care Home Cashflow by Saving Tax
Author Rachel Sanders of Jex Capital Allowances
Many Care homeowners are missing out on the tax savings inherent in refurbishments, new builds, and acquisition of their Care homes across the UK. Despite this tax relief being available on the statute books for decades, the mechanics of claiming tax savings remain a mystery to most. However, with costs increasing and tax rates due to increase too, there is no better time to get round to relooking at any savings that may be available to you.
What are capital allowances?
Costs incurred in a business are identified as either capital or revenue expenditure. In a property context, revenue expenses are the repairs and maintenance aspects of running the Care home, for example fixing damaged items or redecorating. These items are expensed against the running costs of the business. However, capital expenditure is an investment, such as buying a Care Home or building an extension. This expenditure is treated differently from revenue and isn’t deductible from trading profits. Instead, Care homeowners and other investors, can claim “Capital Allowances” on qualifying expenditure within that classification. There are different types of qualifying expenditure, however, our focus in this insight is termed “Plant and Machinery”. Once quantified these allowances reduce the overall taxable profits, and thus create a tax saving. We have two main classifications of plant and machinery:
Integral Features or Special Rate
These are items of plant and machinery that are fittings and fixtures that are more fundamental to buildings. Examples include Lifts, hot and cold-water systems, heating and ventilation systems, electrical lighting, and general power. Integral features currently receive the writing down allowance of 6%.
Main Pool Plant and Machinery
Main pool items are generally everything else that’s not part of the structure, or that falls into integral features. Examples of these include fire alarm systems, security, sanitary appliances, furniture, and fittings. The writing down allowance that is currently given to general pool allowances is 18%
Finally, the government has provided further incentive by creating an annual investment allowance or AIA. This provides 100% tax relief on qualifying plant and machinery up to set expenditure limit within a year, currently £1m.
Tax planning is required as a business/individual can choose how to allocate the annual investment allowance (AIA). However, allocating it to Integral Features first, obtains the fastest tax relief as these allowances would otherwise attract the lowest writing down allowance of 6%. Any amounts over and above the AIA allowance, would remain in at the normal rates of 6%, or 18%.
In addition to these we can also claim Structure and Building Allowances (SBA’s) – on eligible construction costs incurred from 29th October 2018, at an annual rate of 3% on a straight-line basis.
How do I claim capital allowances?
Firstly, the good news is that there is no time limit in claiming Capital allowances if the assets are still owned and in use. However, there are several complex matters to resolve including identifying the actual qualifying assets, and in the case of acquiring assets, ensuring that the correct agreements and due diligence are carried out at pre contract stage.
We are delighted to say at Jex Capital Allowances we can guide our clients through the process and prepare the necessary computations, audit trail and documentation to make a successful claim. In 2022 alone, we have analysed circa £85m of acquisition or construction expenditure relating to the care home sector, identifying in the region of £37.5m of expenditure qualifying for tax relief, thus achieving more than £7m of actual tax saving for our Care Home Clients.
About Jex Capital Allowances
Jex Capital Allowances is an independent specialist capital allowance consultant specialising on the acquisition, construction, refurbishment and fitting out of investment and owner-occupied properties. Typically, we are instructed or retained to directly act on property related expenditure by owner occupiers, tenants and property investors. We are also commissioned by several accountancy and multi-disciplined surveying practices to provide a seamless integrated capital allowance solution and value to their clients. Our extensive cost databases, up to date taxation, technical surveying construction knowledge and strong working relationship with HMRC places our clients in the best position to maximise their tax advantage following capital expenditure.
For further details on how Jex Capital Allowances can help you and to carry out a free, no obligation proposal, visit Capital Allowances (buyacarehome.com)
Care Market Insurance Update
Working with the Care Home sector as part of a wide range of industry sectors the specialist care home team at Finch work with care home owners to tailor indemnity insurance packages to suit specific requirements.
Introducing Finch as the latest partner to join the Buyacarehome and Ownacarehome communities the specialist care home insurance broker provides insurance cover for:
- Elderly residential
- Nursing homes
- Learning difficulty
- Supported living
- Domiciliary care
Ensuring that the insurance policies will “meet the requirements of the relevant Care Authority.”
Working with Chandler & Co will give you access to some of the most competitive funding available in the market.
Are you looking to refinance, acquire a care home, carry out an extension, refurbishment or buy equipment in 2023? As independent specialist care home brokers we have a wealth of experience to access the finance support that you need to continue your care sector journey.