Tax Adviser Stewart & Co Chartered Accountants
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Commercial to residential conversions: Tax hurdles to overcome

Jerome Lane looks at the key tax issues when converting commercial property to one or more residential dwellings.

3rd Dec 2019
Tax Adviser Stewart & Co Chartered Accountants
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Warehouse converted to modern flat in dockland area
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With the changing shape of the high street, empty commercial units are becoming more common. Considering the housing shortage, converting commercial buildings into residential properties may provide a great opportunity to enhance the appearance of town centres, once the planning office and the local community give their approval.

However, there are tax hurdles that need to be overcome when converting commercial property to one or more residential dwellings. Here are a number of the key issues of which agents need to be aware:

VAT

Notoriously complicated for property and construction transactions, and with a high transaction value, VAT mistakes in this area can be extremely costly. To appreciate the VAT implications, it is necessary to first understand some basic rules:

  1. The first disposal of a residential property just brought into existence is zero-rated for VAT purposes. The disposal must be either a freehold sale or lease exceeding 21 years (20 years in Scotland);
  2. The subsequent letting or onward sale of residential property as a dwelling is normally exempt from VAT;
  3. A disposal of a commercial property brought into existence in the previous three years is standard rated for VAT purposes; and,
  4. The letting or sale of older commercial property is generally exempt from VAT.

Option to tax

The effect of rule three above is that an owner or prospective buyer will often register for VAT and make an “option to tax” election with HMRC on commercial property in order to recover the VAT expense suffered. Consequently, they would be required to charge and account for VAT on future rents and other income earned from the property if they operate a commercial letting business.

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