Flat Conversion Allowances
Flat conversion allowances were introduced from 11 May 2001 and allow property owners and occupiers to claim 100 per cent allowances on capital expenditure incurred on the renovation or conversion of vacant or underused space above shops and commercial premises. This provides immediate tax relief for the conversion costs against any income received from letting the property.
The availability of the allowances is dependent on certain conditions being met. Broadly, these are as follows:
the expenditure must be qualifying expenditure;
the property must be a qualifying property;
the flat must be a qualifying flat; and
the person claiming the allowance must have a relevant interest in the flat at time that they incur the conversion or renovation expenditure.
Flat conversion allowances are only given in respect of expenditure which is capital expenditure that is incurred in connection with the conversion or renovation of a qualifying building or part of a qualifying building into a qualifying flat. The costs of dividing a single property to create a number of separate flats or the cost of installing a new kitchen or bathroom are examples of capital expenditure which may be incurred in a conversion project. Capital repairs to the property which are incidental to the conversion or renovation may also qualify for the 100 per cent capital allowances.
Certain categories of expenditure are specifically excluded from the definition of qualifying expenditure for the purposes of the flat conversion allowance. These include the purchase price of the property, any extensions to the property, other than those which provide access to the flat, the development of land adjoining the building and the provision of furniture and furnishing.
The aim of the scheme is to target unused space in properties situated in traditional shopping streets and similar locations and to bring it within the residential rental market. This has an impact of the type of properties that count as qualifying properties for the purpose of the scheme.
The first condition is that the property must have been built before 1980. This is to encourage the regeneration of town centre locations and existing buildings. However, this requirement is treated as met if the property has subsequently been extended on or after 1 January 1980, providing that the extension was completed on or before 31 December 2000.
The property must not have more than four storeys above ground level. In counting the number of floors, an attic is taken into consideration only if is being used or has been used to provide living accommodation. Further, it must appear that at the time of construction, the storeys above ground level were intended primarily for residential use. These must have been either unoccupied or used only for storage for at least one year before the conversion work starts. As the intention is to increase the housing supply, the 100% capital allowances are not given for conversion or renovation of properties already in residential use.
As far as the ground floor is concerned, all or most of it must be authorised for business use, both at the time that the conversion or renovation work takes place and for the period during which the flat is available for letting. This largely means that the ground floor must be used as a retail shop, a food or drink outlet, for the provision of financial or professional services, as an office for industrial use of a type permitted in residential areas or for the provision of medical or health services.
To meet the definition of qualifying expenditure, the conversion or renovation costs must be incurred in relation to the provision of a qualifying flat. A qualifying flat is one that meets the following list of requirements:
it is in a qualifying building;
it is suitable for letting as a dwelling;
it is held for the purpose of short-term letting;
it is possible to access the flat without using that part of the ground floor authorised for business use;
it does not have more than four rooms;
it is not a high value flat;
it is not created or renovated as part of a scheme involving the creation or renovation of one or more high value flats; and
it is not let to a person connected with the person incurring the renovation or conversion expenditure (such as member of that person’s family).
A high value flat is one where the rent that could reasonably expected to be received for the flat exceeds the limits set out in the following table.
Number of rooms in flat
1 or 2
£350 per week
£150 per week
£425 per week
£225 per week
£480 per week
£300 per week
This effectively restricts availability of 100% allowances to affordable housing.
The allowances are only given if the person incurring the conversion or renovation costs has a relevant interest in the property. This will normally be a freehold or leasehold interest in the property. However, a person who does not have such an interest at the time the expenditure is incurred may claim the allowances if they become entitled to such an interest as a result of the conversion.
Where all the qualifying conditions are met, a 100% initial allowance may be claimed for the period in which the conversion or renovation expenditure is incurred. The allowances are claimed in the tax return. It is not mandatory to claim the initial allowance in full or at all. Instead, writing down allowances (25% of costs) can be claimed instead.
The initial allowances available on flat conversions are used in the same way as other capital allowances and can be set against income derived from the personal property income business. In the main, this is likely to be rental income from the flat and any other let properties that the person may have. If a loss arises, this can be carried forward and set against future property income. Alternatively, unused capital allowances can be set against the person’s other income for the same and following tax years.
The availability of initial allowances provides immediate tax relief for the conversion and renovation costs incurred. As the use of capital allowances is not restricted to off-set against property income this is a potentially valuable relief.
However, adjustments, known as balancing adjustments, may be made if certain events take place within seven years of the time at which the flat was first suitable for residential letting. The effect of this is that allowances given on the conversion of renovation will be clawed back. The most common of these events is the sale of the property within seven years. Therefore, those looking to take advantage of the availability of flat conversion allowances should be looking for a longer-term investment rather than making a quick profit.
Town centre locations can command a premium on rents, particularly amongst the younger market. The availability of flat conversion allowances can make a potentially worthwhile conversion of unused space above the flat an even more attractive proposition.