Flat Conversion Allowance

Did you know that under the Flat Conversion Allowance scheme you can get income tax relief on the cost of converting or renovating the empty space above a shop, café, office or surgery and turning it back into use as residential flats?



This relief will be withdrawn for expenditure incurred on or after 1 April 2013 for businesses within the charge to corporation tax, and on or after 6 April 2013 for businesses within the charge to income tax.


The entitlement to claim writing down allowance  on any outstanding residue of qualifying expenditure will also cease with effect from the same dates.


However, as always with such a nice tax break, there are some rules.


Qualifying Expenditure

To qualify for the allowance, the money spent has to be on items of a “capital nature” 

Qualifying expenditure is capital expenditure incurred on, or in connection, with:

• the conversion of part of a qualifying building into a qualifying flat, or
• the renovation of a flat in a qualifying building to create a qualifying flat, or
• repairs incidental to the conversion or renovation of a qualifying flat, or
• the provision of access to a qualifying flat.

The part of the building on which the expenditure was incurred must have been unused or used only for storage for the year before the work begins.

Examples of qualifying expenditure are the costs of dividing a single property to create a number of separate flats, and the costs of building dividing walls or installing a new kitchen or bathroom. Capital repairs to the property incidential to the conversion or renovation may also qualify.


Expenditure incurred in connection with the conversion or renovation of a flat may include costs outside the direct boundary of the new or renovated flat such as the creation of stairwells within the building or provision of extension, solely to provide access to the new flats. It may also include architect's and surveyor's fees.

Examples of associated costs that may qualify are:

• inserting or removing walls, windows, or doors,
• installing and upgrading plumbing, gas, electricity or central heating,
• re-roofing incidental to the conversion/renovation,
• providing access to the flat(s) separate from the commercial premises, including extensions to the building to contain this access, if required,
• providing external fire escapes where regulations require.

Some expenditure does not qualify for flat conversion allowance (FCA). Expenditure does not qualify if it is incurred on or in connection with:

• the acquisition of land or rights in or over land,
• an extension to the building (unless it is required to give access to a qualifying flat),
• the development of land adjoining or adjacent to the building. This includes conversions forming part of a larger scheme of development, and
• the provision of furnishings or other chattels.

Example Rick runs a café-bar. It is in the ground floor of a 3- storey building. Rick has a 75-year lease of the building. He uses the first floor for storage. He does not use the second floor. He converts the two upper floors into flats for letting. He incurs expenditure on installing bathrooms and central heating and on furniture for the flats. The cost of the bathrooms and the central heating qualifies for FCA. The cost of the furniture does not. The only access to the upper floors is a staircase from the café. Rick builds an outside staircase to provide separate entrances for the flats. The cost of constructing the staircase also qualifies for FCA.

Qualifying Buildings

A qualifying building is one:

• in which all or most of the ground floor is authorised for business use,
• where it appears that, when the building was constructed, the storeys above the ground floor were for use primarily as one or more dwellings,
• which has no more than 4 storeys above the ground floor, and
• whose construction was completed before 1 January 1980.

The ground floor (or part of it) is "authorised for business use" if it is approved for use for specific business activities. These are defined in terms of the use for which the premises are rated in ratings legislation.

Broadly, the classes of business use that qualify are retail shops, premises for the provision of financial and professional services, premises for the sale of food and drink, other offices and premises for research and development activities and industrial processes which can be carried out in residential areas, and premises for medical and health services, such as doctor's surgeries and dental practices. In detail, this means:

Building in England or Wales

Authorised for use within class A1, A2, A3, B1 or D1(a) as set out in the Schedule to the Town and Country Planning (Use Classes) Order 1987.

Building in Scotland

Authorised for use within classes 1, 2, 3 or 4, as set out in the Schedule to the Town and Country Planning (Use Classes) (Scotland) Order 1997 or specified in Article 3(5)(j) of that Order.

Building in Northern Ireland

Authorised for use within classes 1, 2, 3, 4 or 15(a) as set out in the Schedule to the Town and Country Planning (Use Classes) (Northern Ireland) Order 1989 or specified in Article 3(5)(b), (c) or (h) of that Order.

The upper floors must have been originally primarily for use as dwellings. Normally the original use should be clear from the design and appearance of the building.

There may have been some business use in the upper floors. For example there may have been storerooms, offices or workshops or, indeed, the shop may have extended above the ground floor. A building will be a qualifying building provided the greater part of the storeys above the ground floor were for use primarily as dwellings. For example, a four-storey building could qualify if it was built with a showroom or office on the first floor, provided that it appears that the original purpose of the second and third floors was residential.

Do not count the attic when you consider the number of storeys unless it can be lived in. An indication of this would be windows in the roof and proper stair access. An attic or loft that is not suitable for living in does not count as a storey, even if it can be used for storage.

The requirement that the building must have been completed by 1 January 1980 is met even if it has been extended subsequently, as long as the extension was completed on or before 31 December 2000. An extension to a qualifying building only to provide access to a qualifying flat can qualify for flat conversion allowance (FCA). FCA cannot be claimed in respect of conversion or renovation work on an extension that was completed after 31 December 2000.

You may make a FCA claim on the cost of converting a basement into a flat. The conversion costs will qualify provided that the building is a qualifying building.

Example Rick's café has a basement that is disused. If Rick converts it into a flat for short-term letting the conversion costs will qualify for FCA.

What is a Qualifying Flat?

A qualifying flat is a flat that:

• is in a qualifying building;
• is suitable for letting as a dwelling;
• is held for short-term letting;
• is accessible without using the business premises;
• has no more than 4 rooms ignoring kitchens and bathrooms and closets, cloakrooms and hallways that are not more than 5 square metres in area;
• is not a high value flat;
• was not created as part of a scheme involving the creation or renovation of one or more high value flats; and
• is not let to a person connected with the person who incurred the conversion or renovation expenditure.

Short-term letting of a flat is letting the flat as a dwelling for a term or period of not more than 5 years. A letting under an assured shorthold tenancy will be short-term letting provided that any initial fixed-term lease does not exceed 5 years. The potential for a period of statutory periodic tenancy after the expiry of the fixed term does not alter this.

Example  Rick runs a café-bar. It is in the ground floor of a 3- storey building. Rick converts the top two floors to qualifying flats and lets them to Sam on a 20- year lease on the understanding that Sam will use them for short-term letting. Sam lets the top flat to Louis on a 5-year lease and the first floor flat to Lisa on a 4-year lease. Rick can claim flat conversion allowance (FCA).

A qualifying flat does not need to occupy only a single floor within the building.

A flat must remain a qualifying flat for a period of 7 years from the time it is first suitable for letting if the person holding the relevant interest wants to avoid a balancing adjustment.

A flat is suitable for letting from the time it, and any other necessary conversion or renovation work, has been completed, so that it would be reasonable to regard the flat as available for short- term letting. There is no requirement that the flat is actually let. A flat could be held for letting if it is being actively marketed and a tenant is being sought.

A flat will not cease to be a qualifying flat during a period while it is temporarily unsuitable for letting, provided it was a qualifying flat immediately before that period. This means, for example, that a flat would not cease to be a qualifying flat because it is being redecorated between tenancies.

A flat is not a qualifying flat if it is a high-value flat, or is part of a scheme that contains a high- value flat.

A flat is a high value flat if its "notional rent" exceeds specific limits. The notional rent is the rent for which the flat could be reasonably let at the date the expenditure is first incurred on its conversion or renovation. In arriving at the notional rent you should make the following assumptions. They are that, at the time the expenditure is first incurred:

• the conversion or renovation had been completed,
• the flat is let furnished,
• the lease does not require a premium or other payment to be made to the landlord,
• the tenant is not connected with the person who incurred the expenditure on the conversion or renovation, and
• in England or Wales the flat is let on an assured short hold tenancy or in Scotland it is let on a short assured tenancy.

The notional rent limits are as follows:

Number of rooms in flat	Flats in Greater London	Flats elsewhere
1 or 2 rooms	£350 per week	£150 per week
3 rooms	£425 per week	£225 per week
4 rooms	£480 per week	£300 per week

Ignore kitchens and bathrooms, and closets, cloakrooms and hallways not exceeding 5 square metres when determining the number of rooms in a flat.

A flat does not become a high-value flat if, at some time after the conversion or renovation expenditure is first incurred, the rent it could achieve exceeds these limits. The test operates independently of any future movements in the property letting market.

You have to own the property and let it out for seven years after conversion because the allowance can be withdrawn if you sell the flats or the flats stop being used for letting during this period. 


Initial Allowance


The rate of initial allowance is 100%. It is made for the chargeable period in which the qualifying expenditure is incurred.

A person entitled to initial allowance may claim less than the full 100%. If so WDA may be claimed in later chargeable periods.

An initial allowance may be claimed before the flat is let. It is withdrawn if the flat is not a qualifying flat when it is first suitable for letting as a dwelling. It is also withdrawn if the person sells the relevant interest in the flat before it is first suitable for letting.

If an initial allowance is withdrawn assessments can be made or adjusted to withdraw any initial allowances that have already been given.

Example Rick runs a café-bar. It is in the ground floor of a 3 storey building Rick has a 75 year lease of the building. Rick converts the second and third floors of the building into qualifying flats. The work is done during the year ended 31 December 2006. Rick claims an initial flat conversion allowance (FCA) for 2005/06. He sells his lease of the building in January 2007. The FCA claimed for 2005/06 is withdrawn.


Writing Down Allowance (WDA)


If you do not claim the full Initial Allowance, you may claim the balance of the expenditure as a writing down allowance.

The annual rate of WDA is 25% of the qualifying expenditure. You may claim less than the full amount.

There is a limit on the amount of a WDA. A WDA for a chargeable period cannot be more than the residue of qualifying expenditure at the beginning of that chargeable period. The residue of qualifying expenditure is the qualifying expenditure that has not yet been written off.

This is how to write off qualifying expenditure. You deduct an allowance from the qualifying expenditure at the following times.

• An initial allowance is written off at the time the flat is first available for letting.
• Writing down allowance is written off at the end of the chargeable period for which it is made.

A person who has incurred qualifying expenditure on a qualifying flat may claim a WDA if:

• the person is entitled to the relevant interest in the flat, and
• the person has not granted a long lease of the flat out of the relevant interest for a capital sum.

A long lease is one that is for more than 50 years.

How to claim


Making a claim is easy though. 

You simply claim for the flat conversion allowance in the tax return for the year in which the conversion or renovation money is spent - and there are no special requirements beyond the usual self assessment.

The allowance is 100 per cent in the year in which the expenditure happens or if you prefer, you can claim a lower amount, with the balance of the cost spread over later years. 

It’s possible to set the allowance against other income from property and if you don’t have enough property income in that year, the excess capital allowance can be carried forward and set off against future property profits.

Alternatively, excess capital allowances may be set against the person's other income for the year, or the following year.