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HMRC internal manual

Capital Allowances Manual

Outline, background and definitions

CAA01/S393A - S393W and FA12/SCH39/PARA36

Flat conversion allowance (FCA) was introduced by FA2001 to encourage the conversion of empty or underused space above shops and other commercial premises to residential use. The scheme is sometimes referred to as flats over the shop (FOTS)

The allowance was repealed by Schedule 39, FA 2012 and is not available for expenditure incurred on or after

  • 1 April 2013 (for corporation tax purposes) and
  • 6 April 2013 (for income tax purposes).

Therefore where expenditure is incurred on converting empty or underused space above shops and other commercial premises to residential use on or after 1 April 2013 (CT) and on or after 6 April 2013 (IT) it does not qualify for capital allowances unless it qualifies under the normal rules for plant or machinery allowances.

In addition the entitlement to claim writing down allowances on any residual expenditure was also withdrawn from those dates (see CA43400).

Expenditure incurred before 1 April 2013 (corporation tax) and before 6 April 2013 (income tax)

To qualify for the allowance the flats must be available for short-term letting in order to qualify for FCA. Allowances are not available if the flats that are created are high value CA43250. The property in which the flats are situated must have been built before 1980. Conversion or renovation works in an extension to a property built before 1980 that are completed by 31 December 2000 can also qualify for FCA.

The property must not have more than 4 storeys above the ground floor. An attic counts towards this total if it can be lived in.

It must appear that, when the property was constructed, the floors above the ground floor were primarily for residential use. These upper floors must have been either unoccupied, or used only for storage, for at least one year before the conversion work starts. If part of the upper floors satisfies this test, and part does not the conversion expenditure is apportioned. For example, a shop may have three floors above the ground floor that were primarily for residential use when the property was constructed. If two of those floors had been unoccupied for 2 years before conversion work began and one had been used as an office, you should apportion any conversion expenditure that relates to all three floors.

A person who incurs qualifying expenditure in respect of a qualifying flat and who has the relevant interest in the flat can claim FCA.

A flat is a dwelling that forms part of a building, is a separate set of premises and is divided horizontally from another part of a building. A flat can be on more than one floor.

A dwelling is a building or part of a building occupied or intended to be occupied as a separate dwelling.

In the FCA legislation, lease includes an agreement for a lease, but only where the term to be covered by the lease has begun, and any tenancy. It does not include a mortgage.

In Scotland leasehold interest means the interest of a tenant in property subject to a lease.

The scheme is very generous in that the allowance is 100% of the qualifying expenditure. Qualifying expenditure CA43150 is capital expenditure incurred in connection with the conversion of a qualifying building CA43200.

The scheme is very like the IBA scheme in that:

  • FCA goes to the person that holds the relevant interest, and
  • there is a balancing adjustment if the relevant interest is sold or the flat ceases to be held for letting out.

But there are differences:

  • where there is a transfer of the relevant interest there is a recovery of allowances given but the person to whom the relevant interest is transferred cannot claim FCA.
  • the allowances are not recovered if an event takes place more than 7 years from the time the flat is suitable for letting.

Example: Rick runs a café-bar. It is in the ground floor of a 3-storey building that was built 100 years ago. When the building was constructed, the first and second floors were for the proprietor’s accommodation. Rick has a 75-year lease of the building. He uses the first floor for storage. He does not use the second floor. In the tax year 2004/05 he converts the second floor into a flat for letting. Rick can claim an allowance equal to the whole of the conversion costs in 2004/05. If he transfers the lease of the building to Sam he can avoid a clawback of the FCA claimed in 2004/05 by not doing the transfer until after 5 April 2012.