Office to residential conversions can be taxing

20th February 2013

Landlords Must Overcome Hurdles Despite Lifting Of Planning Rules COMMERCIAL LANDLORDS looking to take advantage of government proposals allowing office accommodation to be converted into residential buildings without planning permission must not ignore the numerous pitfalls - says a leading real estate tax lawyer at the Sheffield office of law firm, Irwin Mitchell.

The government announced earlier this year, as part of a package of measures to support economic growth, that it will be introducing new permitted development rights for a change of use from B1(a) office to C3 residential purposes, without the need for a planning application. Alex Barnes, real estate Partner at Irwin Mitchell in Sheffield, said: -It is not surprising that the appetite for converting offices to residential property is at its highest level for decades. Investments in office space have been performing badly, whilst on the flip side, there has never been higher demand for residential property. -The government's announcement relating to planning permission will be popular, but there are some significant hurdles to overcome, particularly in relation to tax. -Tax could be an issue for the seller or the developer and should be addressed at the outset. Stamp duty land tax (SDLT), for example, must be considered as it could be payable at the higher rates applicable to residential property of 5% or 7% (as opposed to 4%). The rate of SDLT will depend on the price payable, the identity of the buyer and whether the property is considered to be residential. -HMRC take the view that if a property's last use was as an office, then the property will be treated as residential for the purposes of that sale if planning permission for residential use has already been granted. In relation to VAT, he said: -It is possible for the buyer to ensure that it either incurs no VAT on most of the conversion costs or alternatively that VAT is only incurred on such costs as the reduced rate of 5%. It is important, however, that VAT is correctly charged by contractors since VAT incorrectly allocated at 20% will largely be irrecoverable. -Whether the buyer can recover any VAT incurred on the conversion will depend on the interest disposed of - freehold titles, long or short terms leases and this will need to be considered carefully. It is important to note that the Construction Industry Scheme may apply to the contractors engaged on the conversion works. Failure to comply with this will incur penalties. Mr Barnes added: -While the conversion of redundant, underperforming office space into desirable residential units may seem the obvious solution in respect of certain properties, there are a number of potential pitfalls that could catch out the poorly advised developer. Doing your homework and structuring the transaction in such a way so as to deal with the numerous tax issues is vital.