Can a commercial property be converted to residential?

Since the law changed in 2015 in the UK with the introduction of The Town and County Planning (General Permitted Development) Order, the process of changing the usage of a property from commercial to residential has been simplified.

Between the law's 2015 inception and 2019, 54,000 new residential properties were converted. As a result, there are now a substantially higher number of buildings that have previously been used as commercial properties that can have their usage changed to residential living.

The broadening of this scope offers increased opportunities to developers. However, there are some hidden complexities that property developers should explore before committing to a project to ensure that they fully comply with all the legalities and end up with a successful and lucrative project.

Why convert a commercial property for residential use?

Commercial properties have been a useful commodity for conversion for a long time because they are generally spacious and ripe for development to residential use. This has been even truer in the past year as commercial properties have become less attractive as office or warehouse space. There is simply reduced demand for commercial premises since more employees have been home-based remote workers.

What's more, with an increasing number of commercial premises remaining empty as a result of the pandemic, this has lowered rental potential for commercial landlords and made more properties available to have their use changed. Combined with the fact that there is increased demand for housing in 2021, it has almost become a necessity for some developers to convert older commercial properties into new homes.

Can a commercial property be converted to residential?

Many commercial properties can be converted from commercial properties, such as shops, restaurants or offices to residential homes or apartments. However, before you embark on a conversion, there are several steps to consider first. Importantly, not every property is eligible for a change of use from commercial to residential and it is essential to ensure that the property you have in mind does not fall under this category of exemptions.

What are the exemptions?

Although the majority of commercial premises are eligible to have their usage changed, some commercial buildings cannot be converted into residential, including:

• Buildings that are located within National Parks or Conservation Areas

• Buildings within designated Areas of Natural Beauty

• Buildings that have a listed status

• Buildings in an area that is hazardous to safety or within a military explosives zone

• Buildings in an area of scientific interest

Is planning permission required?

Planning permission may be required when you are changing the use of a property. However, you will not need planning permission if the conversion takes place under the Permitted Development rights or you are not changing the "use class" of the building.

Up until recently, UK buildings were divided into four different classes: A, B, C and D:

• Class A buildings encompassed shops and restaurants

• Class B buildings included offices and warehouses

• Class C buildings referred to residential buildings, hotels and care homes

• Class D buildings included schools, doctor's surgeries and leisure premises

As of 1st September 2020, Class A and D have been revoked, and several buildings from within the Class B category have been recategorised. Many of the buildings within these old classes now fall within one of the following new classes:

• Class E governs buildings used for commercial, business or service use

• Class F1 is for learning and non-residential institutions

• Class F2 buildings include any buildings for local community uses

• Sui Generis is the classification given to any building that falls outside the defined limits of any other use class.

You can find more detailed information on building classes and changes here.

Even when there is a change of class, you may not need planning permission, though you might require approval from your local council. For example, shops, banks, retail showrooms and some other commercial premises that are smaller than 150 square metres will need you to apply to the council for a change of use.

However, even with these properties, if you intend to change the building's exterior or move any windows or doors, then planning permission may still be necessary. Additionally, planning permission is also often required for larger premises.

What is "Permitted Development"?

Under the GDPO, there are many cases where change of use may be permitted without planning permission. This can include premises where a developer is changing the use class of a building. However, that is often subject to prior approval.

Prior approval simply means that a developer must seek approval from their local planning authority before commencing work on the building to ensure that certain features of the development are acceptable and they can proceed with developing the premises. The process is relatively simple and you will need to send an application to your local planning authority for this prior approval.

What are the benefits of converting a commercial property?

As a developer, you will find that many commercial landlords are willing to sell for competitive prices, especially in the current climate, which gives a huge scope for a lucrative development project. What's more, many commercial properties are desirably located in urban areas where higher resale prices and residential rentals can be achieved once the project is complete.

Ultimately, a commercial building gives you the chance to refurbish the property in the style that you want without having to start from scratch as you would with a new-build property, allowing for quicker turnaround times on the development.

For more information about residential and commercial property development, selling land, housebuilding and construction, contact us and our team of experts will be happy to assist you.

How the stamp duty holiday helps homebuyers and landlords

In July 2020, as a result of the coronavirus pandemic, Rishi Sunak put measures into place to get the economy up and running again, and one of these measures was the stamp duty holiday in England and Northern Ireland.

The new threshold exempts buyers from paying stamp duty on homes worth less than £500,000. While second-home buyers would still have to pay 3% stamp duty, this applies to all residential properties. Originally, the scheme was due to run until March 31st 2021 but has since been extended to 30th June 2021. From that point until 30th September, there is to be a staggered return, with stamp duty being free on properties under £250,000. If you are a first-time homeowner, you will pay no stamp duty on homes under £300,000 and a reduced rate on homes between £300,000 - £500,000.

Unless you are a first-time buyer, you will have to pay stamp duty on residential properties costing more than £125,000 as of 1st October 2021.

As you can imagine, the stamp duty holiday has been welcomed by homebuyers who are now acting quickly on their house purchases to make the most of the saving.

How the stamp duty holiday helps homebuyers and landlords

Homeownership is critical to the UK economy, upward mobility, and the ambitions of many people who are currently finding it difficult to purchase a house. Given recent events that have brought the economy to an almost grinding halt, it is essential that the UK economy gets moving again, so giving first-time buyers a leg up to get on the property ladder is one way to kick start it.

However, it is not the first time a stamp duty holiday has been implemented. A stamp duty holiday helped double the number of home sales during the 1992 recession. A 12-month stamp duty holiday was also one of the steps put in place to help the property sector recover during the 2008 financial crisis.

Zoopla, the property portal, has found that around 750,000 buyers will have benefitted from the stamp duty holiday by the time it ends.

It has especially benefitted those buying properties in the North East, where two-thirds of properties currently for sale fall under the £250,000 threshold. Buyers in these areas will therefore have plenty of opportunities to buy a property without having to pay any stamp duty whatsoever before the end of September.

The stamp duty holiday also means that not only are buyers saving a significant amount of money for the time being, but that house sales are going through quicker than ever.

Buyers are obviously keen to compete before the end of the scheme, and sellers are aware that the property market is likely to see a drop in demand when the stamp duty holiday scheme comes to a close, so are eagerly pushing sales through and accepting offers more readily to get it done.

The stamp duty holiday makes no distinction between those buying their first home or those who are well up the ladder, making it great news for anyone looking to buy a house under £500,000 at the moment.

The stamp duty holiday also means that those looking to buy their starter home will benefit from more of them being available.

The stamp duty holiday also benefits landlords and property investors

Anyone buying a second home, whether as a buy to let or an investment or holiday home still has to pay a 3% stamp duty surcharge, but they still make savings thanks to the stamp duty holiday. The lower threshold will have bought those thinking about dabbling in the investor market to go ahead and make the purchases while they can make savings.

Final thoughts

All in all, the stamp duty holiday has helped homebuyers, whether they're taking their first step towards homeownership or they're well and truly up the ladder, while also benefitting landlords and potential property investors. It has also given the UK economy a boost at a time when it is very much needed, which is a win all around!

Here at NFC Homes, we are always looking to buy land for development. If you're looking to sell land and want to know more, please get in touch with us for a free, no-obligation quote.

Selling land: What are the tax implications?

For most individuals looking to sell small plots of residential land in the UK, tax is usually not an issue. Any uplift earned from selling land of this type will typically not see any deductions due to taxation. For larger plots of land, this situation may change, meaning you may have to account for taxation when that land is sold. This can apply even when the entire process takes several years to complete. Consequently, knowing the type of taxes you may have to pay is an important step if you're in possession of a larger plot of land you're looking to sell.

When do I need to pay tax for selling land?

As mentioned above, it's important to point out that there is usually no tax that needs to be paid for any sales involving land smaller than 0.5 hectares. If you're looking to sell smaller plots of land - such as your main residence or part of your garden - any uplift earned once a sale has been completed should be tax-free.

If the plot of land you're looking to sell is considerably larger (such as a farmer's field or an industrial site), taxation will be a factor worth considering, the details of which can be found below.

Capital gains tax

Once your sale is complete, you may have to pay some deductions. These deductions will be part of your capital gains tax. If you inherited the land, you might have to pay the probate cost as well. On the other hand, you will also have to budget for incidental selling costs and acquisition costs.

Capital gains tax applies when your land sale is more than your yearly exemption. Currently, the capital gains tax for such individuals is £11,300 (2021). For residential property, any increase above the maximum exemption will be charged an extra 28% tax deduction.

The capital gains tax was revised by the Finance Act of 2016. The Act states that taxes can't be more than 28% of the land sale proceeds. The legislation also clarified disposable land and residential property. Therefore, if your land can be converted from commercial to residential, you could be protected from certain taxes.

Income tax

Some land sales attract income tax, though most people prefer capital gains tax because it's lower.

Many developers build structures to pay capital gains instead of income tax. When this practice became rampant, the government created new anti-avoidance regulations in 2016. The aim was to make sure that companies pay income tax when they sell land for profit. Nevertheless, this is still a grey area since classifying a particular land trade is difficult. The tax authorities will evaluate the seller's intention before asking for capital gains tax or income tax.

First, they will try to determine whether you are trying to make a profit from your sale. If you have been doing similar transactions in the recent past, then a profit motive may be detected. In this case, you may be asked to pay income tax.

Another consideration will be the type of financial arrangement. Short-term financing and ownership are indicators of a profit motive. Consequently, if you are selling land that you bought within the last year, you may have to pay income tax instead of capital gains tax.

Finally, the tax regulator will scrutinise the sale contract. For instance, profit-sharing shows a profit motive. If you will own a part of the subsequent real estate development, you can't claim capital gains taxes. Remember, it's always best to seek out professional advice on tax before making any decisions.

Detailed information

After you have sold your land, your tax adviser will ask for several documents. They will use these documents when filing your tax returns. Some of the main things that they will request include:

Acquisition details

A transfer deed usually accompanies any land transaction. Your tax adviser will request this document to determine your probate value. The probate value comes into play when selling inherited land. They may also require copies of the will and land deeds.

If the land was a gift from a benefactor, you would have to provide details of the gift. The reliefs received during the date of the gift can be claimed as tax deductions. Similarly, the land value of any gift received before April 1982 will be lower. This is because the valuation will not be adjusted for inflation.

Improvements and additions

You may decide to do some things to increase the value of your land. Such improvements and additions reduce your tax rates because you can claim them as deductions. Nevertheless, you must prove that the extra cost went to the enhancement of the land. For example, if you spend money on creating better drainage on the land, you should provide the corresponding documentation to your tax adviser.

Professional deductions

Many people may be involved in the sale of the land. For example, agents and attorneys, who will levy some fees. HMRC may give you deductions if you can prove that they were incurred during the disposal of the property. Consequently, your agent should give you an invoice that indicates the land registration details, which can support your deduction claims.

Evidence of intentions

As indicated above, the boundary between capital gains and income tax is not clear. Several factors come into play when determining the type of investment. In many instances, the final judgment will be based on the documents that you provide to HMRC. If you want to pay capital gains tax, you should stay away from documents that show a profit motive.

Final words

Selling land is a straightforward process when you work with the right people. Although you can hire a tax adviser to guide you through the process, you should know the tax implications of land transactions. This is the best way to avoid surprises and unnecessary tax expenditures. If you are looking to sell land for development, we'd be interested in hearing from you. We can not only purchase your land, but we have an experienced planning and construction team to manage the whole process from start to finish. Get in touch for a free review of your land. NFC Homes and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.