Work |
Cost (£) |
Revenue (£) |
Capital (£) |
Partitioning the
largest bedroom on each of the first and second floors to get two extra
bedrooms |
3,500 |
- |
3,500 |
Upgrading fire safety
system throughout the building, over and above residential use, required in
order to secure HMO licence |
5,000 |
- |
5,000 |
Rewiring the property,
which includes the addition of several new power and lighting points |
6,000 |
4,500 |
1,500 |
Washing facilities in
each room –required for HMO licence (but replacing in two bedrooms, which
already had ensuite facilities) |
2,500 |
800 |
1,700 |
While the upper two
floors helpfully already had bathrooms, Joe adds additional toilet facilities
by extending and partitioning off existing bathrooms |
2,000 |
- |
2,000 |
Re-fitting the kitchen
and adding extra cupboard space, cooking and refrigeration facilities |
5,000 |
3,500 |
1,500 |
Structural repairs |
3,000 |
3,000 |
- |
Redecorating and plastering
throughout |
8,000 |
7,000 |
1,000 |
|
|
|
|
TOTALS |
35,000 |
18,800 |
16,200 |
Points to note:
Clearly, creating additional bedrooms or toilet facilities is going to be capital expenditure, as would extending the property.
In this case study, the local authority has demanded that an inherently superior fire safety system be installed throughout the building, even down to the fire-rating of the cabling. Even so, it is not an allowable expense but an improvement, because it is of a higher standard than it would need to be for an ordinary residence and cannot therefore be ‘replacing like with like’.
The electrical re-wiring, on the other hand, has no special requirements imposed due to the property being an HMO. Although it will almost certainly be superior to the wiring system it replaces, it is to the same modern-day equivalent ‘standard’ as the old wiring. The cost has been split between replacement components, and the capital additional parts, sockets and fittings in the various rooms.
Likewise, the kitchen is to be of a similar standard as the one it replaced – when it was new. However, the extra cupboards, fridge and cooker, etc., will be disallowable capital.
Re-decorating and plastering has been apportioned on a reasonable basis between work on the additional rooms and the rest of the property.
Joe could claim capital allowances (including the 100% annual investment allowance) on capital expenditure on ‘plant and machinery’ located outside of dwellings. This definition would include heating, lighting, fire safety systems, and similar. A temporary change in HMRC’s interpretation of ‘dwellings’ meant that, for roughly a couple of years up to October 2010, expenditure incurred on communal kitchens, bathrooms and lounge areas in HMOs could be eligible for capital allowances. But such areas are now basically considered to have become part of the dwelling-space again, so expenditure now will not qualify for capital allowances, except perhaps in some non-dwelling areas such as communal entrances, stairwells, and similar (HMRC Brief 45/10).
Case Study 4: Conversion into apartments
Valerie has acquired the adjoining property to Joe: she doesn’t fancy the additional hassle of running HMOs and instead converts her property into three separate two-bedroom flats with kitchen-diners. Her project requires structural work to each floor, although she sensibly keeps kitchen and bathroom facilities in the same location where she can. She also installs a small lift to make the upper floor more accessible.
Work |
Cost (£) |
Revenue (£) |
Capital (£) |
Structural alterations |
10,000 |
- |
10,000 |
Re-wiring – including separate meters |
8,000 |
3,000 |
5,000 |
Replacement (to a similar standard) and additional kitchens and
bathrooms |
16,000 |
4,000 |
12,000 |
Redecorating / plastering throughout |
8,000 |
4,000 |
4,000 |
Lift installation |
15,000 |
- |
15,000 |
|
|
|
|
TOTALS |
57,000 |
11,000 |
46,000 |
Points to note
Perhaps unsurprisingly, since less is left of the original property than in Joe’s conversion, Valerie’s project costs are more capital-oriented.
Valerie may also be able to claim capital allowances on the retro-fitted lift in the stairwell, and the electricity meters if they are not inside the separate dwellings, as well as heating, lighting and electrical wiring and fixtures in those communal areas.
VAT and changing the number of dwellings
Both Joe and Valerie may well be eligible to be charged just 5% VAT on construction services on their respective conversions, undertaken by VAT-registered tradesmen. This would include materials paid for as part of works but not materials paid for separately. Particular care is needed with HMOs.
Conclusion:
It is understandable that full-blown property conversions are likely to be more expensive and to include more capital costs, which (aside from capital allowances) cannot immediately be recovered. But using the rules for apportionment can still secure valuable tax relief against letting profits. Even in HMOs, it is possible to secure a useful claim for capital allowances in the non-dwelling areas.
It is essential to keep a good record of those otherwise unclaimable capital costs so that they can be claimed when the property is sold, rather than being completely wasted.