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taxadvisor.uk
taxadvisor.uk, Chartered Certified Accountant
Category: Tax
Satisfied Customers: 4718
Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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Dear Sirs I have inherited a property, this is a large house

Customer Question

Dear Sirs
I have inherited a property, this is a large house which is suitable for conversion into flats.
I am looking at the affordability of the conversion and I was wondering what tax relief will be available, if any, on the cost of conversion.
Also is there any way I can reclaim the VAT.
Many thanks in advance for your help.
Submitted: 2 years ago.
Category: Tax
Expert:  taxadvisor.uk replied 2 years ago.

Hello and welcome to the site. Thank you for your question.

Tax relief available is as follows:

VAT reclaim -
Renovating, refurbishing or extending an existing dwelling is not covered under VAT scheme of reduced rate at 5% as outlined on VAT Notice 431. These carry VAT at the full rate of 20%.

More information on VAT on conversion, renovation etc can be found here

http://www.homebuilding.co.uk/advice/existing-homes/renovating/vat

If you can meet all the requirements as set by HMRC here, then the new flats would qualify for zero-rating..look at "What houses or flats qualify for zero-rating"

http://www.hmrc.gov.uk/vat/sectors/builders/new-houses.htm

Capital Gains -
You will be able to claim the cost of conversion as a capital cost in arriving at the gain on sale of flat etc. The value of the property inherited at the time of inheritance would form the basis of your cost price plus all expenditure of conversion including professional fees paid etc.

I hope this is helpful and answers your question.

If you have any other questions, please ask me before you rate my service – I’ll be happy to respond.

Customer: replied 2 years ago.

I am confused! Will I pay VAT at 0%, 5% or 20%?

Also will I get tax relief on conversion costs immediately or only when I sell the converted property?

Expert:  taxadvisor.uk replied 2 years ago.

Lynne, thank you for your reply.

VAT rate on conversion

In order for construction costs to qualify for zero rated VAT , you have to demonstrate that a qualifying building has been, is being, or will be constructed. Examples of when a qualifying building is constructed (VAT Notice 708 – Building and construction) are:

- it is built from scratch, and, before construction starts, any pre-existing building is demolished completely to ground level (cellars, basements and the ‘slab’ at ground level may be retained)

- the new building makes use of no more than a single facade (or a double facade on a corner site) of a pre-existing building, the pre-existing building is demolished completely (other than the retained facade) before work on the new building is started and the facade is retained as a condition or requirement of statutory planning consent or similar permission

- a new building is constructed against an existing building so that they share a wall but there is no internal access between them;

VAT at the reduced rate of 5% would apply if you are converting the premises into a multiple occupancy dwelling – see para 7 and 14.5 of VAT Notice 708.

In my view if you are intending to convert the big house into flats, conversion costs would be reduced- rated at 5% as you would be carrying out a qualifying conversion.

You can view VAT Notice 708 here

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_PublicNoticesAndInfoSheets&id=HMCE_CL_000513&propertyType=document#P724_79734

Tax relief

Tax relief on conversion costs would only be available when you sell the converted property and not immediately.

I hope this is helpful and answers your question.

If you have any other questions, please ask me before you rate my service – I’ll be happy to respond.

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