Flat conversion allowances should be maximised before it is too lateBy: Stuart Rivers

In 2001 the Government introduced the Flat Conversion Allowance (FCA), to encourage landlords to convert empty or underused space above shops and other commercial outlets into residential properties. But 12 years on, in the wake of the Government’s abolition of FCAs, many Capital Allowance specialists have been left dismayed by the lack of uptake of the incentive.

Findings published by the Royal Institute of Chartered Surveyors (RICS) last month, following the UK Residential Lettings Survey of January 2013, highlighted that tenant demand is continuing to grow at a faster pace than new property is becoming available. With such a significant need for residential lets the argument for redeveloping qualifying commercial space has never been stronger. But only a small number of astute landlords and developers took advantage of the FCA opportunity before it was withdrawn by Chancellor George Osborne in his March 2013 budget.

The number of rules surrounding FCAs will undoubtedly have deterred many building owners from pursuing a conversion project: Providing a tax break of 100 per cent in the first year enabled companies to save at least £20,000 and individuals to recoup £40,000 for every £100,000 spent on a conversion project of this kind.

But of course there were a number of qualifying factors that dictated whether or not FCAs could be claimed. For instance, for a taxpayer to qualify for FCA, the empty or unused space must not be more than four storeys above the ground floor, the converted flat must be accessible without using the business premises and it must be available on a short-term letting arrangement. (See list of qualifying factors below).

The underlying problem is how poorly publicised the FCAs were during their existence, and how restrictive the rules were for taxpayers to qualify. If an alternative allowance were to be introduced in the future, the Government should consider the variety of commercial buildings that are ripe for development.

The business rates that landlords continue to pay on empty commercial properties is a stark reminder of how costly unused space is. Figures released by The Taxpayers’ Alliance (TPA) highlighted that £11.1m of empty property tax was collected from Bristol commercial landlords in the 2011-2012 financial year alone (£9.2m from landlords in Reigate & Banstead, and £7.8m from Northampton in the East Midlands).

At a time when the Government ought to be supporting the recovery of the property market following the recession, such costs simply increase the burden on building owners. The answer is to "use it or lose it".

There is still time for property owners to maximise their conversion investment though. Developers of qualifying projects completed before 31 March 2013 can make claims up to 31 March 2015, and while the FCAs themselves have now been abolished there is a window of opportunity before the final deadline.

There are so many initiatives out there designed to save you money, but they either remain unacknowledged because nobody knows they exist or they appear so complicated that companies and individuals fear they are not worth the effort. As with all types of Capital Allowances – whether they relate to FCAs, plant and machinery investments or Enhanced Capital Allowances  – taxpayers should gain a professional opinion first and not dismiss these opportunities.

Qualifying Factors for the Flat Conversion Allowance

A Qualifying Building

• Is one in which all or most of the ground floor is authorised for business use.
• Where it appears that, when the building was constructed, the storeys above the ground floor were for use primarily as one or more dwellings.
• Has no more than four storeys above the ground floor.
• Construction was completed before 1 January 1980.

A Qualifying Flat

• Is suitable for letting as a dwelling.
• Is held for short-term letting.
• Is accessible without using the business premises.
• Has no more than four rooms (ignoring kitchens and bathrooms and closets, cloakrooms and hallways), which are not more than 5 sq m in area.
• Is not a high value flat.
• Was not created as part of a scheme involving the creation or renovation of one or more high value flats.
• Is not let to a person connected with the person who incurred the conversion or renovation expenditure.

About the author

Stuart Rivers is a well respected figure within the Capital Allowance arena. He regularly delivers lectures and seminars on Capital Allowances to accountants, lawyers, surveyors and various regions of the Chartered Institute of Tax.

Stuart qualified as a Chartered Quantity Surveyor (RICS) in 1978 and worked for major national surveying practices before forming Stuart Rivers Associates in 1993.