Repurposing real estate assets, in particular retail assets, is expected to be a key trend in the coming months and years. In this article we look at five of the key tax considerations to think about when considering repurposing buildings.
1. What rate of SDLT will you pay on acquisition?
If you need to acquire land prior to converting it, it’s worth remembering that the rates applicable to residential and non-residential land can vary significantly. If the land already has residential accommodation on it, or construction for conversion into residential accommodation has begun, then the residential rates may apply, but this is subject to the both multiple dwellings relief and the “rule of 6” (ie an acquisition of six or more dwellings can be treated as an acquisition of non-residential land). Particular care needs to be taken in relation to buildings which have previously been used for both residential purposes and non-residential purposes and are currently out of use.
2. Will the building costs on conversion be subject to VAT?
When building from scratch, building costs are normally standard rated unless you are building residential buildings, in which case construction services can be zero rated. However, if a building is residential or part residential to start with, and you converting to residential, then zero rating will not be available, or may only be available in part. If a building is not in use at all, you have to look back 10 years to confirm its status for VAT purposes.
3. Could there be unexpected Capital Goods Scheme charges?
If you’ve incurred capital expenditure on your commercial property (and recovered the VAT, in particular in the last 10 years), and then you repurpose your property so that you are making exempt supplies, this could result in a clawback of some of the VAT. This is most obviously the case if the use changes to residential but could also arise due a change in the profile of your tenant or other occupiers (for example if you allow charities to occupy the building for certain purposes).
4. Are your activities investment or trading?
If the repurposing and change in business plan might include a decision to sell all or parts of the property now or in the future, then there could be an appropriation from investment to trading or an exposure under the Transactions in UK Land rules (which target profits realised on disposal following development, amongst other things). Careful and early consideration is required to understand what impact this might have.
Separately, repurposing may involve landlords providing additional services in relation to such properties which go beyond the normal landlord services, which could result in trading income. Whilst trading income and property rental income is taxed at the same rates in the UK, for certain investors this could still have an impact (eg REITs who are only exempt on rental income and pension funds, who may not be permitted as a regulatory matter to receive trading income).
5. Will you still be able to claim capital allowances?
It is worth remembering that capital allowances (including structures and building allowances) are generally not available in relation to residential properties (some relief can be claimed in respect of common parts) and that if you are trading in property, capital allowances are not available at all.
In all cases, early consideration of these issues is key, and best done alongside the initial analysis from a real estate and planning perspective, to ensure that all bases are covered and any tax costs are priced into the decision making process.
For more information on market and legal issues for repurposing retail assets in the UK, as well as in France, Germany and Spain, see our research paper “Repurposing Retail” here.
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