Airspace developments – Kreston Reeves and United Trust Bank

Freeholders of property often want to consider how to maximise their returns for their property and we have seen an increase in the development of airspace since the relaxation in the planning rules in 2020.  These allow the creation of new homes in the space above an existing building, by the addition of one or two storeys depending on the scheme.  This is particularly prevalent where the supply of building land is scarce, such as in cities.

In this brief article we seek to highlight some key considerations for freeholders of property wanting to develop their airspace.

Funding

“Funding an airspace development is not as straightforward as funding a traditional build so specialist lenders may be your best place to start.” Jonathan Nail of United Trust Bank (UTB) is currently working on funding solutions for two airspace schemes and describes what UTB looks for when considering such proposals.

“Airspace developments bring a whole new level of complexity to a build and the challenges which must be overcome to deliver a successful project are considerable. As such, when we’re assessing whether or not to support an airspace scheme, we look for experience, experience and experience!”

“As well as satisfying all the usual criteria required by a lender, including a fully costed schedule of works and firm evidence of the expected sales values supporting the gross development value (GDV), we will also want to see that the developer and/or main contractor have experience of delivering successful airspace schemes and, if relevant, of employing specialist construction materials, such as light gauge steel which can provide strong but light superstructures. It’s also important for developers to know how to navigate the complex logistical problems presented by airspace developments such as rerouting existing services and utilities, the delivery of materials to the site, which may be several storeys up, and/or their storage if space is not available on the ground. Also, knowledge of how to manage any arising tenant issues and how to overcome them successfully, are important skills.”

“A good airspace development also upgrades the existing building, and although some disturbance to those who live or work in the property is inevitable, the benefits can be far ranging. For example, works may include refurbishing communal areas, improving parking and landscaping and contributions to sink funds for future works. These refurbishment works may increase the desirability and value of all the units in the building, at no cost to the leaseholders or freeholder. The addition of more units may also mean that future costs are shared between more leaseholders, potentially providing a cash saving to each owner in the building. Airspace schemes can help to extend the lifetime of a building too and are therefore a sustainable way of delivering new homes.”

“With the right knowledge and the right professional support, airspace development can bring many opportunities.”

Taxation

Colin Laidlaw, the Director and member of our specialist Real Estate Team, advises that care needs to be taken to ensure that there is no lost tax or unexpected surprises.  If there is a profit to be made you can be sure that HMRC will be interested.

There is no one size fits all answer as there are many variables.

Areas to consider include:

• How will any development be undertaken. Will you:
  • develop the airspace yourself.
  • sell/lease the airspace to a developer.
  • enter into a Joint Venture or similar.

• If developed yourself, once completed what will you do with it?
  • sell/grant a long lease.
  • retain it for investment purposes.

• What sort of entity will be undertaking the work
  • Corporate Body (Ltd Co).
  • Partnership (incl LLP).
  • Individual.

• What are you building
  • Commercial space.
  • Residential.
  • Mixture of both.

• What can you include as a base cost when selling the property

Depending on these points and the type of the transaction:

• VAT may be payable.
• VAT may not be able to be claimed back.
• VAT registration may be required.
• For companies, Tax may be due either as trading income or under the chargeable gains rules.
• For individuals (or partners in a partnership) income tax or capital gains tax may be due.

It is likely that some tax/VAT will be payable but forewarned is forearmed and with appropriate advice the exposure can be quantified and potentially addressed. Specialist tax advice should be sought before proceeding with any work to avoid any surprises.

If you would like to discuss your tax/VAT position or need any further guidance, please contact Colin on email or call us on 0330 124 1399. Find out more at here.