From April 2010, a 50% income-tax rate is due on earnings over £150,000. To reduce the impact, the Schmidt Report says high earners could use laws introduced in 2001 to encourage landlords to turn space on the UK high street into affordable housing.
Investors can take advantage of tax allowances at their highest marginal rate on qualifying costs of conversion (defined in section 393B of the Capital Allowances Act 2001). To qualify, the expected rental of a two-room flat over a shop mustn’t exceed £350pw in Greater London; £150pw elsewhere.
Say Jim buys a flat for £100,000 and has to spend £100,000 more on qualifying expenditure, including work to turn the flat into two self-contained units. He funds the costs himself, then claims for relief against other taxable income (of £250,000), so gets relief of £50,000 (50% of £100,000).
He then mortgages the units for £100,000 at a fixed rate of 6% and rents them out at £125 a week. He now has an income-producing property valued at £200,000, which cost £50,000 “in simple cash flow terms”. Interested high earners should get professional advice.