UK: Flat Conversion Allowances (FCA)

Introduction

Flat conversion allowances (FCAs) are available for qualifying expenditure incurred on or after 11 May 2001. The allowances available include a 100% initial allowance, or a 25% annual writing down allowance. In some respects the FCA regime is similar to the Business Property Renovation Allowance regime in that investors who incur qualifying expenditure, but do not otherwise carry on a property trade or other trade, are treated as carrying on a property trade so that they can claim the allowances. The rules also provide for only certain properties to be within the regime. However FCAs will be abolished after 2012, so if it is considered advantageous, serious consideration should be given to claiming the allowance before its abolition. Further details on the relief are set out below.

Conditions for claiming FCA

Allowances are available to a person incurring qualifying conversion or renovation expenditure on part of a qualifying building to turn it into or keep it as a qualifying flat. The person must have a relevant interest in the flat for the expenditure to qualify.

Qualifying Expenditure

Qualifying expenditure is that incurred on the part of a building or flat that has been unused or used only for storage, for a period of one year ending immediately before the date the conversion or renovation work began. Qualifying expenditure includes:

• Conversion costs;
• Renovation costs;
• Repairs to a qualifying building to the extent they are incidental to the conversion or repair work.

Expenditure does not qualify if it is for the acquisition of land or rights over land, the extension of a qualifying building, the development of land adjoining or adjacent to a qualifying building, or on the provision of furnishings or chattels.

Qualifying Building

A qualifying building is one meeting the following requirements:

• All or most of the ground floor of the building must be authorised for business use (for example class A1, A2, A3, B1 or D1 in England & Wales Town & Country Planning (Use Classes) Order 1987 definitions);
• When the building was constructed, the storeys above the ground floor must have been intended for use primarily as one or more dwellings;
• The building must not have more than 4 storeys above the ground floor (an attic does not count unless it is or has been used as a dwelling);
• The building was constructed before 1 January 1980. If such a building was extended so that the extension was completed on or before 31 December 2000, it will still qualify.

Qualifying Flats

A qualifying flat is one which must be suitable for letting as a dwelling, and held for short term letting (a lease for a period not exceeding 5 years). Other conditions the flat must meet are:

• There must be no more than 4 rooms (this excludes (i) kitchens, (ii) bathrooms and (iii) hallways, cloakrooms, closets not exceeding 5 square metres in total);
• It must be possible to gain access to the flat by not going through the ground floor area authorised for business use;
• It must not be a high value flat or have been created/renovated as part of a scheme involving one or more high value flats;
• The flat must not be let to a person connected with the person who incurred the conversion or renovation expenditure.

High value flats are those whose notional rent, on the date of first conversion or renovation expenditure, exceeds that in the table below where it is assumed that the flat is let furnished on a short lease without premium.

The Relevant Interest

The relevant interest in a flat is the interest of the person incurring the expenditure that is reversionary to all other interests of that person. In addition where a person is entitled to a relevant interest on completion of conversion work, the interest is treated as having arisen when the qualifying expenditure was incurred.

Claw Back of Allowances on Balancing Events and Associated Proceeds

There is a balancing adjustment (balancing allowance or balancing charge) if a balancing event occurs within seven years of the time when the flat was first suitable for letting as a dwelling. Balancing events are:

• Sale of the relevant interest
• Grant of a long lease out of a relevant interest for a capital sum;
• Where the relevant interest is a lease, that lease ends and the person entitled to the reversion does not acquire it;
• The person who incurred the qualifying expenditure dies;
• The flat is demolished or destroyed;
• The flat ceases to be a qualifying flat without being demolished or destroyed.

One implication of this is that a balancing event can no longer occur for a qualifying flat which was first suitable for letting in January 2002.

Tax relief and other conditions

An initial allowance of up to 100% of qualifying expenditure can be claimed for the chargeable period in which expenditure is incurred. An initial allowance will not be available, however, if at the time the flat is first available for letting, it is not a qualifying flat, or if before that time the taxpayer has sold his interest in the flat. The initial allowance is 'written off' when the flat is first available for letting, so that there is always a possibility of clawback of allowances if the flat is never suitable for letting.

Writing down allowances (WDA) of 25% on a reducing balance basis can be claimed for any qualifying expenditure not already taken as an initial allowance. It is not possible to claim WDAs however, unless the claimant has a relevant interest, and has not granted a long lease out of his interest for a capital sum. The flat must also be a qualifying flat.

The tax treatment of individuals and companies claiming the allowances is similar to that for claimants of Business Premises Renovation Allowances and you should refer to that briefing note for more detailed information on this area.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.