Changing tenure on unsold properties − what are the tax implications?

15 March 2019

Housing associations with a high number of unsold shared ownership and market sale properties may want to consider changing their tenure to rental properties. Deloitte explains some of the wide-ranging tax issues that would need to be considered.

Recent press coverage indicates that housing associations have the highest number of unsold shared ownership and market sale units since the 2008/09 recession. Given this, housing associations may want to think about changing the intended use of the completed (or under development) units to provide an increased number of rental units. This change of tenure can have complex tax implications:


As a starting point, VAT on purchases (including land, construction and professional services) can be recovered in line with the housing association's intention at the time when the VAT is incurred. For example, if a housing association intends to use the costs incurred to deliver and make solely taxable supplies (e.g. 10 zero-rated shared ownership or market sale units), this VAT incurred should be recoverable in full. 

However, if the housing association then decides to rent out five of the units previously intended to be sold (either in tranches or in one transaction), then the VAT recovery position on associated costs will change. This is based on the assumption that the same entity is changing intention but the housing association could potentially consider structuring to use different group entities.

As income generated from rental units is exempt from VAT, the housing association should restrict the VAT recovered to reflect the exempt use, in line with its agreed VAT recovery method. If the intention changes during the year the VAT has been incurred, this can be adjusted as part of the housing association's partial exemption calculation annual adjustment.

Further complexity can arise when VAT-able expenditure has been incurred in prior VAT years when the intention changes and/or when first use has already occurred:

  • If the expenditure is more than £250k (net of VAT) and first use of the unit(s) in question has occurred, adjustments will be necessary under the Capital Goods Scheme. This tracks the use of the asset over a 10-year period, with adjustments made on an annual basis. Full details can be found at HMRC VAT Notice 706/2.
  • Where first use of the asset has not occurred (i.e. the units are still in development or have not been sold) and VAT has been recovered, adjustments may still need to be made under the ‘clawback’ provisions where intended use changes from taxable to exempt use. In such circumstances, a proportion of the VAT recovered must be clawed back by HMRC under the ‘change of intended use’ rules. Guidance on clawback provisions and how to make adjustments is set out in Paragraph 13 of HMRC VAT Notice 706.  

Corporation Tax

Where properties which have been developed with the intention of sale are appropriated to be held for rent, there will be a deemed disposal of the property at the point the intention changes. The company holding the properties will be deemed to have sold and reacquired the property at market value at that date. Unlike the position if a property is appropriated to stock from fixed assets, there is no opportunity to defer this gain until the property is sold so if the appropriation generates a gain for tax purposes this will be taxable in the period of appropriation.

The taxable profit will not be matched by cash or accounting profits and so if the appropriation profit arises in a company which mitigates its taxable profits through donations, this can lead to a position where the company has insufficient cash and/or distributable reserves to reduce its taxable profits to nil.

Groups may wish to consider whether it is more efficient to transfer properties to another group company, which could pay for the properties and so prevent the mismatch arising. However, this would have cash flow and potentially SDLT consequences which would need to considered.

Stamp Duty Land Tax 

If the housing association claimed Stamp Duty Land Tax (SDLT) charities relief on the purchase of land and within three years of that purchase the land was no longer used for qualifying charitable purposes, there would be a clawback of SDLT relief. 

In summary

Given the values often involved and the complexities that exist in establishing the correct tax position, it is critical to consider the tax position at the earliest opportunity, and to seek guidance and advice where appropriate.