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Home | News & events | Legal updates | Flat conversions: Tax reliefs

Flat conversions: Tax reliefs

24 May 2010

On the conversion of commercial properties to flats, there are a number of potential reliefs or incentives that should be considered, although not all of them will be available in every case.

VAT

Generally, VAT incurred on residential conversion costs is likely to be irrecoverable. However, VAT is only payable at a reduced rate of 5% on construction costs and building materials used to convert commercial property into residential accommodation.

There are a number of conditions that have to be complied with, and this reduced rate does not cover the costs of installing fittings or furnishing the property.

Capital allowances

There is a flat conversion allowance available, enabling owners or occupiers to claim tax relief up-front on the whole of their capital spending on the conversion of vacant space above commercial premises to provide flats for rent.

The conditions that have to be satisfied:

• the property must have been built before 1980
• the property must not have more than five floors (basements are excluded)
• the property must have been originally constructed so that the floors above the ground floor were primarily for use as dwellings. All or most of the ground floor must, at the time the conversion works starts, be authorised for business use under class A1, A2, A3, B1 or D1(a)
• the upper floors must either have been used purely for storage or have been unoccupied for at least one year before the conversion work starts
• the new flats must also satisfy a number of further conditions; for example, they must have no more than four rooms excluding the kitchen and bathroom and other small areas; they must be self-contained with external access separate from the ground-floor premises and certain high-value flats are excluded

If there is an onward sale of the flats or they cease to be used for letting, then there may be a clawback of the relief if such an event occurs less than seven years from the time the flat is completed.

Grants

Some local authorities have made grants available to help with the capital cost of converting premises over shops into flats. The level and conditions that attach to these grants vary from council to council, but their aim is to encourage increased residential accommodation in the centre of towns. Often, however, these grants have to be repaid if the property is sold within a certain time scale.

Business rates

If the converted flats are occupied by different individuals from those who own the shops, then the flats will be subject to council tax and not business rates.

However, if the commercial and residential property are under the same occupation this will be a ‘composite hereditament’, and whether the flat is treated as domestic or non-domestic property will be dependant on the facts of each individual case, although if little work connected with the business is carried out in the flat it is likely the flat will be subject to council tax rather than business rates.

Stamp Duty Land Tax

Whilst Stamp Duty Land Tax (SDLT) would generally be payable on the sale of the converted flats, the SDLT exemption for first-time buyers should be remembered.

This is available on sale of residential property of up to £250,000 completed between 25 March 2010 and 25 March 2012 if the following conditions are satisfied:

• the property must be wholly residential and cannot be the acquisition of a lease of less than 21 years
• the buyer must intend to occupy the property as his main or only residence
• the buyer must not have previously acquired a major interest (i.e. freeholds and leases of more than 21 years of property either in the UK or abroad) in residential property

© Shoosmiths. This page is for general information: it is not legal advice. Please read our full terms and conditions for details of the disclaimers and exclusions which apply.

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Tom Wilde

Associate
T: 03700 86 8713
I: +44 (0)118 965 8713
E: tom.wilde@shoosmiths.co.uk