Things to consider when converting property into flats

Whether you're a homeowner looking to make a profit from selling your home, or a landlord splitting a property into two or more units, converting your property into flats could be a lucrative option. Here's what you should consider.

Related topics:  Landlords,  Property,  Development
Property | Reporter
3rd July 2023
PCL flats 567
"The increasing demand for rental properties, especially as some landlords are leaving the market, presents opportunities for buy-to-let investment, and bridging loans provide the necessary speed and flexibility to capitalise"

What are the steps taken to convert a property into flats?

Converting a property into flats in the UK typically involves several steps and requirements. When investors used bridging for residential investment properties converting a property into flats was the most common use of the funds (49%). Here are a few key aspects to be considered:

Planning Permission: The majority of property conversions require planning permission from the local authority/council. Investors will need to submit a planning application, including detailed plans and documentation outlining the proposed changes. This can be assessed on several factors, such as the impact on the surrounding area, parking provisions, and compliance with building regulations.

Tax Implications: When converting a property into flats in the UK, there are a number of tax implications to consider:

- Stamp Duty Land Tax (SDLT): Investors may be liable for SDLT if the conversion creates additional dwellings. Rates and thresholds vary, so investors may need to consult with a tax advisor or HMRC guidelines.

- Capital Gains Tax (CGT): Selling the flats in the future may subject investors to CGT on the profit. Factors like income, ownership duration, and primary residence status affect the amount.

- Value Added Tax (VAT): VAT may apply to construction and renovation costs based on property type, work nature, and contractor's VAT registration.

Income Tax and Rental Income: Declare rental income for tax purposes. Income tax applies to rental profits after deducting expenses. Seek guidance from a tax advisor for compliance with reporting and payment requirements.

Building Regulations: Compliance with building regulations is crucial for ensuring that the property meets health, safety, and accessibility standards. This involves various aspects such as fire safety, structural integrity, insulation, ventilation, and electrical installations. Investors will likely need to engage a building control inspector to oversee the construction process and certify compliance.

Structural Considerations: Depending on the property's existing layout and design, structural alterations may be necessary to create separate flats. This could involve installing additional walls, creating new entrances, ensuring proper fire safety measures, and addressing load-bearing considerations.

Legal Considerations: It's important to ensure compliance with relevant legislation, such as leasehold and landlord-tenant laws, if investors plan to lease or sell the flats. Specific regulations and procedures may vary depending on the location and local planning requirements.

Bridging finance

Bridging finance's original raison d'etre was a financial tool to help home buyers purchase a new property before selling their own, however, this survey highlights the significant popularity and effectiveness of bridging finance as the preferred funding option of property investors who convert buildings into multiple dwellings, such as flats and HMOs.

Whilst many BTL landlords are threatening to leave the market due to increased financial pressures from successive interest rate hikes and changes as a result of the Renters' Reform Bill, a new survey of landlords and renters in the UK discovered rental demand has increased by 62%, and 36% of renters have experienced difficulties finding rental properties in their desired locations.

This surge in demand has contributed to a substantial rise in rents, with prices now 26% higher than pre-pandemic levels and 47% higher over the past decade. These figures indicate that the private rental sector in the UK continues to present investment opportunities.

Bridging finance could be the answer for investors looking to convert their property into flats for several reasons:

Speed: Bridging finance offers quick access to funding, allowing investors to seize opportunities and start the conversion process without delays. Traditional financing options may involve lengthy approval processes, while bridging loans are designed to provide funds rapidly, often within a matter of weeks.

Flexibility: Bridging loans are typically more flexible than traditional mortgages. They can be tailored to suit the specific needs of property conversions, such as providing funding for refurbishments and construction work. This flexibility allows investors to adapt their financial arrangements as the project progresses.

Short-term nature: Bridging loans are short-term loans, usually ranging from a few months to a couple of years. This aligns well with the timeline of property conversions, which tend to be relatively short-term projects. Once the conversion is complete, investors can either sell the individual flats or refinance with a long-term mortgage.

Property value-based lending: Bridging loans are often secured against the property itself rather than being solely dependent on the borrower's creditworthiness. This means that the loan amount can be based on the property's potential future value after the conversion. This aspect is especially beneficial when the property's value is expected to increase significantly after the conversion, as it allows investors to access a higher loan amount.

Bridging to long-term financing: Once the property has been successfully converted into flats, investors can explore long-term mortgage options to replace the bridging loan. With the improved value of the property and potential rental income from multiple flats, investors may be in a stronger position to secure favourable long-term financing terms.

What types of bridging finance are available?

Light Property Conversion Finance in the UK is designed for smaller-scale conversions. It's suitable for projects such as transforming a single residential property into multiple flats or changing the use of an existing property. This type of finance is ideal for investors seeking funding for relatively straightforward and less extensive conversion projects.

On the other hand, Heavy Conversion Finance caters to larger and more complex conversions. 36% of bridging loans used for residential investment were used to heavily refurbish property to sell for a profit.

This type of bridging finance is specifically designed for projects that involve significant renovations, commercial property conversions, or substantial structural modifications. This type of finance is suitable for investors undertaking extensive and demanding conversion projects that require substantial funding and expertise.

Both Light and Heavy Conversion Finance options provide investors with the financial support necessary to undertake property conversions in the UK. The choice between the two depends on the scale, complexity, and nature of the conversion project at hand.

A spokesperson from Finbri said: “The increasing demand for rental properties, especially as some landlords are leaving the market, presents opportunities for buy-to-let investment, and bridging loans provide the necessary speed and flexibility to capitalise. It's a strategic move that can allow investors to maximise returns and tap into the private rental sector in the UK.”

More like this
Latest from Financial Reporter
Latest from Protection Reporter
to our newsletter

Join a community of over 20,000 landlords and property specialists and keep up-to-date with industry news and upcoming events via our newsletter.