In this months article, Arthur Weller writes about some useful tax reliefs that are available for the property developer/renovator.
Business Premises Renovation Allowances (BPRA)
The Government are proposing a new scheme, the Business Premises Renovation Allowance (BPRA), to provide 100 per cent capital allowances for the capital costs of renovating or converting unused business premises in disadvantages areas in order to bring them back into business use.
What this means is that you will be able to offset the costs incurred against the property income rather than having to wait till you sell the properties before you offset the costs.
John buys a property that qualifies for the BPRA (see qualifying criteria below). The property costs £100,000. He then spends £20,000 making capital improvements to the property which increase the value to £150,000.
John also has 5 standard buy-to-let properties, which have a combined rental income of £30,000. This means that John can offset the £20,000 cost of renovating the property against the rental income of his other properties.
If the property had not qualified for BPRA allowance, then John would only be able to offset the cost until he sold the property.
The disadvantaged areas are those 2000 designated Enterprise Areas in the 2002 Pre- Budget Report.
A full list can be found on the Revenue website at www.inlandrevenue.gov.uk/so/disadvantaged.htm.
The scheme is open to all individuals and companies, operating in any sector of the economy, and regardless of business size, who own or lease business property that has previously been unused for twelve months or more. They will be allowed to claim upfront tax relief on all capital expenditure on the renovation or conversion of the property in order to bring it back into business use.
The scheme will apply once state aid approval has been granted.
To qualify, a building must:
- Be situated in one of the disadvantaged areas
- Have been unused for a year or longer
- Have last been used for business premises (and not a dwelling).
This is defined as capital expenditure on the conversion of a qualifying building (defined above) into qualifying business premises (defined below).
The following types of expenditure will not qualify:
- Acquisition of land or rights over land
- Extension of the building except to provide access
- Development of adjoining land
- Provision of plant or machinery
- Repairs, except to the extent that they are incidental to the cost of the renovation/conversion.
Qualifying business premises
The expenditure must result in the premises actually being brought back into productive use, or where they have been renovated for leasing to a new tenant, must be suitable and available for letting for use as the purposes of a trade, profession or vocation, or for uses as offices.
The premises must not be used as a dwelling.
The scheme provides for an initial allowance of 100%, with the flexibility to claim less, if appropriate.
The claim is made by the person who incurred the qualifying expenditure, which allows claims to be made by either owners or tenants of the newly renovated premises.
The scheme is scheduled to run for five years, from a date to be determined, but expected to be in 2005, and BPRA is intended to operate through the normal capital allowances system and claimed in the same way as other capital allowances through the self-assessment return.
Conversion of parts of business premises into flats
Capital allowances are available for expenditure by property owners and occupiers on the renovation or conversion of empty or underused space above qualifying shops and other commercial premises to provide residential flats for short term letting (i.e. on a lease for not more than five years).
The allowances are deducted as expenses of a Schedule A letting business.
The available allowances are an initial allowance of 100%, which may be claimed wholly or in part, and writing down allowances of 25 % of cost per annum (or lower amount claimed) until the expenditure is fully relieved.
A balancing charge or balancing allowance will be made if there is a balancing event (sale, long lease, flat ceasing to be available for letting etc.) within seven years from the time the flat is available for letting. There will be no claw back of allowances if a sale, lease etc. occurs after that time. The allowances are not transferable to a purchaser.
In order to qualify, the properties must have been built before 1980 and must satisfy detailed conditions, including a requirement that the ground floor must be currently rated for business use, there must not be more than four floors above ground level and they must originally have been constructed mainly for use as dwellings.
Additionally the renovated or converted part of the building must have been empty or used only for storage for at least a year, the new flats must be self contained with not more than four rooms (excluding bathroom, kitchen, hallway etc.), and the rental value must be within prescribed limits.
Landlord’s Energy Saving Allowance
Landlords who incur capital expenditure between 6 April 2004 and 5 April 2009 inclusive to install loft insulation and/or cavity wall insulation in residential property may claim an income tax deduction for the expenditure of up to £1,500 per property in computing their rental income.
For new Schedule A businesses, the deduction is available for expenditure incurred up to six months before the business commenced (but not before 6 April 2004). The deduction is not available where the property is let under the rent-a-room scheme or as a furnished holiday accommodation.
In the March 2005 budget it has also been announced that the deduction will also be available if a landlord decides to install solid wall insulation.
VAT on residential conversions and renovations
VAT is charged at the reduced rate of 5% on the supply of services and building materials for:
- The conversion of non-residential property into dwellings
- The conversion of residential property into a different number of dwellings
- The conversion of residential or non-residential property into a multiple occupancy dwelling (e.g. bed-sit accommodation)
- The conversion of non-residential property or one or more residential properties into a care home, children’s home, hospice etc. (where the services are supplied to the person who intends to use the property for that purpose)
- The conversion of a care home etc. into a multiple occupancy dwelling
- And the renovation or alteration of dwellings, multiple occupancy properties and care homes etc. that have been empty for three years or more.
Constructing a garage, or turning a building into a garage, as part of a renovation also qualifies for the reduced rate. Where someone buys a house that has been empty for three years or more and lives in it while it is being renovated, the 5% rate will still apply to the building work providing it is completed within one year from the date the property was purchased.