Urban Renewal - Residential Properties Update

Conversion/Refurbishment of Residential Properties Investors and Owner-Occupiers

Introduction

This article shows how to calculate qualifying expenditure for lessors or for owner-occupiers who purchase a residential property, which has been converted or refurbished, from a developer.

It also deals with what happens where:

• An owner-occupied property is purchased or sold during a tax year
• An owner-occupied property ceases to be owner-occupied or recommences to be so used
• An owner-occupier shares the property.

Developer in this article means a builder or other person who sells the property in question in the course of a trade. All references to a property are to one where conversion or refurbishment expenditure qualifies for relief under one of the various property incentive schemes.

Rented Residential Property

Where a converted or refurbished property is bought the general position is that the purchaser qualifies for relief on the lower of:

• The amount of the expenditure which the seller spent on the conversion or refurbishment in the qualifying period
  and
• The actual cost of the property itself to the purchaser.

Where the seller only incurred part of the conversion/refurbishment expenditure in the qualifying period, the actual cost of the property to the purchaser is treated as being reduced proportionally.

Property purchased from developer

If expenditure is incurred on construction by a developer, qualifying expenditure for the purchaser includes a proportion of the developer’s profit on the construction (e.g. Section 334(7)(b) and Section 346(7)(b) TCA 1997).

Revenue accepts that where expenditure is incurred on conversion or refurbishment by a developer, qualifying expenditure for the purchaser includes a proportion of the developer’s profit.

Example A

Developer buys a derelict property for £30,000 which includes the site cost. He spends £45,000 on refurbishment (£35,000 within the qualifying period) and sells the property in the course of his trade. The property is bought by Ms. B for £100,000 and is first let under a qualifying lease by her. Qualifying expenditure for Ms. B is calculated as follows:

Qualifying expenditure is

A x	B
	C + D

where

A Actual cost of the property itself

B Refurbishment expenditure in the qualifying period

C Total refurbishment expenditure

D Cost of the existing property (including site cost)

£100,000 x	£35,000
	£45,000+£30,000 =	£46,667

Owner-Occupiers

Property purchased from developer

An article on this subject was carried in Tax Briefing - Issue 29.

As in the case of rented residential accommodation, an appropriate proportion of a developer’s profit may be treated as qualifying expenditure. The same formula as applies for Rented Residential Property above may be used.

Entitlement to owner-occupier relief for year of purchase/sale

A full year’s owner-occupier relief may be claimed for the year of purchase or sale of a qualifying dwelling, provided the property is the only or main residence of the ‘owner-occupier’ at some time during that year.

Where an owner-occupier sells a qualifying property and purchases another qualifying property within the same tax year, relief in respect of each property may be claimed for that year provided that each property is the individual’s main residence at some time in the tax year.

Cessation of use as a residence or re-commencement of such use

Where an owner-occupier ceases to use a property as his/her only or main residence but does not sell the property, the owner-occupier relief will be allowed for the year of change, provided that the property was used by the individual as his/her only or main residence in the tax year involved.

Likewise the owner-occupier relief will be granted for a tax year in which the individual recommences to use the property as his/her only or main residence (e.g. after a period of non-use or letting).

Owner-occupation and sharing arrangements

Owner-occupiers frequently share their property with family or friends. In such situations the owner-occupier relief continues to apply, provided that the property is used by the individual as his/her only or main residence in the tax year involved. Any income from the sharing arrangement should, of course, be included in the owner-occupier’s tax return.