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bigduckontax
bigduckontax, Accountant
Category: Tax
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A building has a flat which is let out and an empty downstairs

Customer Question

A building has a flat which is let out and an empty downstairs storage area which is being converted into another flat to be let out as well. Can any VAT be recovered on the cost of alterations ? There is a VAT registered business where costs have been claimed for
the storage area in the past but now are very minor as it is empty.
Are all the alteration costs of the conversion regarded as capital for capital gains tax should
I decide to sell the freehold in the future ?
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I am Keith, one of the experts on Just Answer, and happy to help you with your question.
Let us get rid of the Capital Gains Tax (CGT) first. When you sell and presumably make a gain then this gain is calculated as follows. Take the selling price and deduct the costs of sale. From this deduct the acquisition price. The acquisition price is the purchase price plus costs plus any additions eg installation of central heating, double glazing, extensions etc but not routine maintenance which can be set against rental income. The difference between the two figures is the gain which is taxed at 18% or 28% or a combination of the two rates depending on your income including the gain in the year of sale. It the letting is Furnished Holiday Letting then Entrepreneurs' Relief may be available which limits the tax rate to a 10% flat rate. Otherwise you may be entitled to Letting Relief up to 40K instead of your Annual Exempt Amount of 11.1K to offset any gain.
The position regarding the VAT is more complex. The rentals you receive are exempt from VAT and this would preclude your recovering the input tax charged on the conversion. Where exempt supplies are concerned input tax can only be recovered in proportion to standard, reduced or zero rated supplies made. However, if you charge VAT on the rentals then recovery is appropriate. The problem here is long term as when you come to sell you must levy VAT on the sales price and this may make the property un-competitive particularly where the buyer is not registered for VAT.
I do hope your friend told you this also and that my response has been of use to you.
Customer: replied 2 years ago.

DearCustomer Thank for that. Vary useful

On the capital gains tax, there is no holiday let and the present let property and the one to be let have never been lived in by me or my wife, so maybe this letting relief of £40,000 is not relevant ?

On the VAT side are you saying that so long as VAT is not charged on the rents, then an eventual sale of the property should be able to avoid any VAT implications ? Does the VAT registered business complicate matters ? I've looked at the Profit and Loss Account (there is no Balance Sheet showing the property as owned by the business; its in my own and my wife's name) and all I can see is a tiddly amount of 'shop rates and lighting and heating, going back to the time when the storage area was active.

Expert:  bigduckontax replied 2 years ago.

I did say 'may' and as you never occupied then Lettings Relief indeed would not apply so CGT would be levied on the gain less 11.1K. If the ownership is joint each owner would be taxed on half the gain and both have an Annual Exempt Amount.

Correct; if you elect not to charge VAT on residential rentals, normally an exempt supply, then the final sale price is not subject to VAT. I would not be over concerned about what happened many years ago. Presumably you did not register your business for VAT.

Please be so kind as to rate me before you leave the Just Answer site.

Customer: replied 2 years ago.

Many thanksCustomerand I think I'm almost there and happy with your answers ' Just to clarify one point -

You say at the end that 'presumably you did not register your business for VAT'. If you mean the rental business, the answer is 'NO'. The registration relates to an entirely separate business in joint names that has been going for a few years now.

Expert:  bigduckontax replied 2 years ago.
No problem there though; it is a separate business.
bigduckontax and other Tax Specialists are ready to help you
Expert:  bigduckontax replied 2 years ago.
Thank you for your support.

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