Minimising your tax on ‘HMO’ conversions

HMO stands for house in multiple occupation. We’ve always had these in the UK, but they seem to be a very topical subject at the moment, no doubt due to our chronic housing shortage and their increased cash flow potential.

The experience of landlords letting HMOs seems to vary with some enjoying greatly enhance profits from this manner of management of their property, and others tearing their hair out with the administrative hassle.


Given the crying need for this sort of accommodation in our arguably overcrowded island, what tax breaks does the government what give to HM out landlords? 
As far as direct tax is concerned it would probably be fair to answer that question with “non-at all”. For example, the dreaded ‘Osborne tax’ (i.e. the phased reduction in relief for interest paid on loans) ap[plies just as much to HMO lettings as to any kind of residential letting.

As far as the costs of conversion is concerned, to make a property suitable for HMO use, these will mostly be non-allowable against rents receive on the grounds that they are ‘capital’ expenditure. True, such expenditure, if carefully recorded and the records kept until sale, will qualify for relief in computing any capital gain on sale of the property.

But as far as immediate tax relief is concerned, landlords are effectively restricted to claiming relief for some redecoration, refurbishment type expenditure, normally owned the the property, and ;let it out for a period prior to the conversion. In that instance , such expenditure should clearly be separated out from the heavier construction work, and the amounts claimed separately.


It’s really in the area of VAT, rather than direct tax, where there are solid and identifiable tax breaks. The rate of tax for qualifying conversions is 5% rather than the standards VAT rate of 20%. A 5% reduced rate of VAT is available for both HMO conversions and for ‘changed number of dwellings’ conversions. The latter category does almost exactly what it says on the tin; where there is a different number of dwellings in a property after conversion as before the work done by the builder, and the materials supplied along with these building services, can be made subject to the reduced 5% rate.

However, there is a definite procedure of this reduced rate which is ensuring that the building contractor charges the correct rate of VAT in the first place. HMRC will not intervene to put things right if an excessive rate of that is being charged.

So, the essential thing is to get this very clear, if at all possible, at the initial contract stage, and before the builder goes on-site. This will sometimes involve reference to accountants or tax advisers on both sides, and it has to be remembered that the person who is vulnerable, if a 5% rate is applied when the strict criteria didn’t apply, is the builder.

This article is our attempt to make an article recently released in Property Tax Insider accessible to all. Why not leave a comment and let us know how we did? For further information on this and other topics then request more information or contact us at 01332-369999 or through the contact page of our website

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