New Flats for Old
By Carl Bayley BSc ACA
In an effort to regenerate some of the UK's urban centres the Government is providing a special tax incentive known as 'Flat Conversion Allowances'.
Broadly speaking, what this allowance does is to enable you to make an immediate claim against your taxable income for the costs of converting qualifying properties back into residential flats.
Furthermore, as long as you keep these flats for a sufficient length of time after completing the conversion work, the allowance will never be clawed back, meaning that Gordon Brown & Co., will, for once, have actually made a contribution in return for their silent partnership stake in your property business!
To qualify for the allowance, the flats must be in a property which was built before 1980 and has no more than five floors in total. The ground floor must be in business use, such as a shop, café, office or doctor's surgery, and the upper storeys must originally have been constructed primarily for residential occupation.
Additionally, in the year before conversion takes place, the storeys above the ground floor must have been used only for storage purposes or been unoccupied.
In other words, the allowance is given for converting former residential property which is now in business use, or vacant, back into residential property.
Let's look at an example of how the allowance might work in practice.
Example
Gordon has a large portfolio of rented properties, giving him net annual rental income of £100,000. As he is a higher rate taxpayer, his income tax bill on his rental income is thus £40,000.
In June 2004, Gordon buys a run-down three storey property on Kirkcaldy High Street. Despite having once been the site where Adam Smith wrote his 'Wealth of Nations', the ground floor is now leased to a rather poor quality fast-food retailer.
However, Gordon is more interested in the upper storeys which are currently unoccupied and in a state of disrepair. He spends £60,000 converting these storeys into a number of small flats which he then lets out.
Not only does Gordon now have a valuable property and a stream of rental income, but he will also be able to slash his tax bill this year by £24,000!
As long as he continues to own the flats for a further seven years after the conversion, this money will never be clawed back.
The only drawback (there has to be one, doesn't there?) is that Gordon cannot claim this same expenditure in his Capital Gains Tax computation when he eventually sells the flats. Even this still leaves a major benefit for Gordon, since he is getting the certainty of tax relief now at 40% at the expense of merely potential future relief, which, due to the impact of taper relief, may only be worth 24% at best (if he holds the flats for ten years or more).
There are some restrictions on the type of flat which you can create out of the conversion. Basically, they have to be small and not particularly luxurious.
The type of expenditure which can be claimed is also restricted and excludes, in particular, the original cost of the property prior to conversion, the cost of any extensions to the property and the cost of furnishing the flats.
Still, on the whole, this is a pretty useful allowance. So, who wants to go to the shops?
