Flat Rate Tax! How to get the government to pay you to convert your investment flat

It is estimated that in England there are about 250,000 homes that have been empty for over six months.

To help solve this problem, the government has now given powers to local authorities to effectively seize control and manage homes that have been left empty for more than six months, under what are called "Empty Dwelling Management Orders"   However, on the subject of getting empty homes back into use, the government has not been so keen to publicise the fact that investors can actually get income tax relief on the cost of converting or renovating vacant property above shops and offices into residential flats.

Spend £60,000 and write off the full amount against tax - So, if you spend say £60,000 on the conversion you could write that full amount off against your income tax bill for that year.


Very few people seem to know about the scheme, which was bought in as one of a number of initiatives to help regenerate the UK's urban areas - and this has resulted in a low rate of take up.

The other initiatives were a lower rate of VAT on residential conversions and a higher stamp duty land tax exemption for disadvantages areas.

This is a real shame and missed opportunity because flats above shops can be bought relatively cheaply.

Also, since tenants often like being in the centre of towns and close to restaurants, bars and shops, they are often happy are often happy to pay a high level of rent for such locations - which all means that yields are usually good too.

As always with such a nice tax break, there are rules:

Rule 1 - Only Capital Expenditure counts. To qualify for the allowance, the money spent has to be of a "capital nature" so things like the costs of dividing a single property to create a number of separate flats or the cost of building dividing walls or installing a new kitchen or bathroom would count. Capital repairs to the property "incidental to the conversion or renovation" may qualify too.

However, money spent on the acquisition of land or of rights over the land - such as buying the freehold of the property, or acquiring a lease - does not qualify. Neither does extending a building (unless it is to give access to the flat) and the cost of providing furnishings will not count either.

Rule 2 - It must be in a shopping street, in a low-rise building and when completed, it must be let out as a long residential let. In addition the property in question must be in a traditional shopping street or similar location, must have been built before 1980 and must not have more than four storeys above the ground floor. (An attic counts towards this total providing it can be lived in.) Also, when the property was constructed, the floors above the ground floor must have been primarily for residential use and these floors must have been either unoccupied, or used only for storage, for at least 1 year before any conversion work starts. If only part of the upper floors meets this test, and part doesn't, then any qualifying expenditure will be apportioned.

So, for example, if a shop has three floors above the ground floor that were primarily for residential use when the property was constructed and if two of those floors had been unoccupied for two years before conversion work began and one had been used as an office, then you would apportion any conversion expenditure that relates to all three floors.

Although the ground floor can have been originally either residential, or commercial, or of mixed us, the majority of the ground floor must be for business use at the time of the conversion work and for the period during which the flat is used for letting. Each new flat built has to be self-contained and access to the street from the flats has to be separate from the ground-floor premises.

Also, each flat must have four or less rooms, excluding the kitchen and bathroom.

Rule 3 - Forget Up market Flats. Forget putting in "posh flats". The rules say that expenditure does not qualify for the allowance if any flats created are "high value" flats, which the Revenue defines as flats which, "when the conversion or renovation work starts would be expected to achieve rents above set limits."

Crucially the new flats must be available for short-term letting, so this is an excellent opportunity for landlord - investors.

The allowance can be withdrawn if, say, the owner sells the flat or the flat stops being used for letting, but not if this happens more than seven years from the time the flat is suitable for letting.

How to make a claim

The flat conversion allowances can be claimed in the tax return for the year in which the conversion or renovation cost is spent and there are no special requirements beyond that is the usual self assessment.

The allowance of 100 per cent can be claimed for the year in which the expenditure happens or a lower amount claimed, in which case the balance of the expenditure may be claimed in subsequent years at a rate of 25 per cent of the cost a year, until the expenditure is fully relieved.

The allowances can be used in the same way as other capital allowances on property for letting. Individuals can set the allowances against their income from property and if there is insufficient income, the excess capital allowances may be carried forwards and set against future property income profits.

Alternatively, the excess capital allowances may be set against the person's other income of the year, or the following year.

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