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HMRC internal manual

Capital Allowances Manual

FCA: Qualifying flat

CAA01/S393D - S393E

A qualifying flat is a flat CA43100 that:

  • is in a qualifying building CA43200;
  • 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 orperiod of not more than 5 years. A letting under an assured shorthold tenancy will beshort-term letting provided that any initial fixed-term lease does not exceed 5 years. Thepotential for a period of statutory periodic tenancy after the expiry of the fixed termdoes not alter this.

Look at the end-use of the flat when you decide whether it is used for short-term letting.The length of a lease to an intermediate lessor does not matter. What matters is that theletting to the occupying tenant is short-term.

Example As in the example at CA43100 Rick runsa café-bar. It is in the ground floor of a 3- storey building. Rick converts the top tofloors to qualifying flats and lets them to Sam on a 20- year lease on the understandingthat Sam will use them for short-term letting. Sam lets the top flat to Louis on a 5-yearlease and the first floor flat to Lisa on a 4-year lease. Rick can claim flat conversionallowance (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 firstsuitable for letting if the person holding the relevant interest wants to avoid abalancing adjustment.

A flat is suitable for letting from the time it, and any other necessary conversion orrenovation work, has been completed, so that it would be reasonable to regard the flat asavailable 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 beingsought.

A flat will not cease to be a qualifying flat during a period while it is temporarilyunsuitable 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 isbeing redecorated between tenancies.

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

You should apply the test whether a flat is a high-value flat when the conversion orrenovation expenditure is first incurred. A flat is a high value flat ifits “notional rent” exceeds specific limits. The notional rent is the rent forwhich the flat could be reasonably let at the date the expenditure is first incurred onits conversion or renovation. In arriving at the notional rent you should make thefollowing 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 5square 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 orrenovation 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.