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Tax, warranties and insurances

How to beat the taxman and insure against risks

One area the individual home builder fares very well in is in their dealings with the Chancellor of the Exchequer. New homes are one of the few items still exempt from VAT. Many individual home builders also escape Stamp Duty because their plot falls below the tax threshold and, best of all, should you come to sell your house and cash in any profit you have created by building instead of buying, you can enjoy it tax free.

Here's how

VAT

New homes including conversions are zero rated for VAT; not to be left out, individual homebuilders are refunded for the VAT they pay on most of the materials and goods that go into their home. Details are laid out in Customs and Excise Notice 719, entitled 'Refunds of VAT to DIY Home Builders ', available from the local Customs and Excise VAT office.

The notice states that claims are only allowed for 'complete new dwellings' provided they are not developed as part of a business. Refunds are not, unfortunately, made on extensions or any other enlargements or improvements to any existing building other than those converted to a dwelling from some other use. The only exceptions to this rule are the exemption of VAT on certain works to listed buildings or where a rebuilt property has been taken down leaving just two walls or less.

The key to dealing with VAT efficiently is to understand which items are exempt and which are not. A general guide or 'rule of thumb ' is that all items installed as an integral part of the building, i.e. the structure, fixtures and fittings are deductible, whilst any item that can be removed and taken away is not deductible. Outdoor items such as a detached garage, fencing and walling, paths, driveways and patios are also exempt, providing they are built at the same time as the dwelling. Non-exempt items include all soft furnishings and decorations such as carpets and underlay, curtains and blinds, clocks and lampshades. Also non-deductible are all white goods such as fridges and freezers etc. Nor is VAT refundable on tool hire or purchase, or on professional and supervisory services. For any items that fall into a 'grey area', it is worth contacting the local Customs and Excise VAT office for a ruling.

In order to make a claim, it is essential that all receipts are kept and this means VAT receipts if possible - no receipt equals no refund! It is also vital to remember everything the first time, as only one claim can be made and it must be within three months of the completion of the project.

To claim, evidence must be provided to prove that the dwelling genuinely exists and has been completed. A typical refund for a four bedroom detached house will be about 5 - 6,000. This can come at a very useful time in the project and can be used either to pay off building accounts or overdrafts, or simply to help towards the cost of all the new carpets, and curtains and furniture.

Remember, though, that VAT is only refundable if you pay it in the first place. If you are using VAT registered tradesmen or builders, then they will not charge you VAT. If, however, you are using a builder for part of the project and organising the rest yourself, you can still make a claim for those items on which you have paid VAT.

Stamp duty

The first tax likely to be encountered in an individual homebuild project is stamp duty. This is payable at a rate of one per cent, on the acquisition of a building plot or property over 60,000. Stamp duty is normally paid through the solicitor, as part of the conveyancing costs. As many plots cost less than 60,000, this tax can often be avoided.

Income tax relief

Those who have borrowed money to buy a plot will be eligible to claim income tax relief on the interest on the first 30,000 of the loan, providing that the land was purchased with the intention of building a home on it and that the home will be the individual's principal private residence. Income tax relief on money borrowed for land is claimed under MIRAS (Mortgage Interest Relief at Source) just as it is on an ordinary house purchase loan.

To claim MIRAS, a simple application form must be completed. Those eligible for MIRAS do not have to reclaim income tax at the end of the tax year, but will instead receive 'tax relief at source'. This means that the relief will be taken off monthly mortgage payments. All credits are at the special rate 15%.

Claiming MIRAS on an individual homebuild project will in no way affect any claim being made against interest payments on an existing home. Even those who purchased their homes before the August 1988 deadline and are still enjoying double MIRAS on two lots of 30,000, can claim yet a third 30,000 of relief on an individual homebuild project. They will, however, like everyone else, revert to a single 30,000 of relief when they sell their existing home and move into the new one.

Despite MIRAS only strictly being available on the principal private residence, i.e. the main home, MIRAS on an existing property and on an individual homebuild project can go on simultaneously for up to three years or until the project is complete.

Capital gains tax

Despite the prospect of a healthy 20-30% paper gain on a well planned and efficiently executed project, the Chancellor cannot get his hands on a single penny of it. Providing that is, that the property is the individual's principal private residence and that the y live in it for at least twelve months.

There is however, some degree of flexibility over this rule. For instance, the Chancellor is fully understanding if someone is left with two properties because they are unable to sell an existing home. The Tax Inspector is also able to exercise considerable discretion if someone is forced to sell their new home before the twelve months are up for professional reasons, i.e. relocation or a new job, or for financial reasons, i.e. unemployment or illness. There are some individuals who go on to build repeatedly, each time living in the new property for one year and meanwhile building another new home. The tax man will tolerate these 'serial self-builders' for only so long before those concerned are deemed to be a developer and are taxed as such.

Getting a warranty

Building your own home should leave you with a property that is worth considerably more than it cost to build, but to help ensure that you can realise this paper profit should you ever decide to sell, it is a good idea to arrange some form of warranty or structural guarantee. This sort of insurance not only protects you against the possible cost of damage due to structural defect, giving you considerable piece of mind, but is also transferable to subsequent purchasers of the property, possibly making it easier to sell. The frequent inspections made by the insurers during the construction also help maintain quality and minimise the risk of anything going wrong.

A warranty is not essential, but many lenders will insist that you arrange some form of professional supervision during the build before they will offer finance. All lenders will accept the NHBC Buildmark warranty and the Custom Build warranty from Zurich Municipal. The alternative is to employ an inspecting agent such as an architect or surveyor to issue progress certificates. Those using an NHBC-registered builder can expect to receive exactly the same warranty on their new home as those on developer built homes, providing, that is, that the builder registers the project and the subsequent inspections are made.

The NHBC also offer a 'structural only' scheme for those using an NHBC registered builder to construct the shell of their home, but then completing the project themselves using subcontractors or their own skills. This scheme offers a similar level of cover to the Buildmark, but only insures the structure of the building. Unlike the Buildmark scheme, the registered builder is not automatically obliged to register a 'structural only' project with the NHBC and so it is up to the individual to ask for a 'structural only' warranty and ensure that this is written into the contract.

Anyone planning to build their own home other than with an NHBC registered builder, for example by using subcontractors, can still arrange a warranty on their home through the Custom Build structural guarantee insurance scheme from Zurich Municipal, part of the Zurich Municipal Insurance Group. Just as with the NHBC scheme, regular inspections are made of the building work by the insurer's surveyors to ensure it is in accordance with their own technical requirements, minimising risks and maintaining quality. The completed property is then guaranteed against major damage which may arise due to a fault in the structure of the house for ten years and will refund the cost of any repair work covered by the policy.

In addition to structural guarantee insurance, many individuals building their own home also opt to use an inspecting architect or surveyor to issue progress certificates. This means instructing an independent professional to inspect the building work at several key stages to certify that the work is in accordance with the building regulations. The stage certificates they issue also provide a form of protection and if there is subsequently any defect, it may be possible to make a claim for negligence or breach of contract.

All-risks insurance

ALL There are a variety of risks associated with owning and being responsible for a construction site and you need to protect against them. There are three main areas of risk:

Everyone who is an employer must hold an Employer's Liability policy and this is necessary whether you are employing sub-contractors or workmen on a more formal basis. As far as your liability is concerned, a subcontractor is an employee and the fact that you are not deducting their PAYE is irrelevant to your liability. If he is hurt on your site, he is entitled to look to you for compensation , so the law says that you have got to be insured.

Public liability insurance is not obligatory, but anyone involved in a building project should have this sort of cover. The householder's policy on your existing house provides this insurance for almost any incident, except for your building operations. For instance, you could receive a claim from the local authority in respect of problems that arose from making a drain connection, or from a passer-by who walked into a pile of bricks at the edge of your site, or even from the parents of a child that trespassed onto your site, climbed the scaffold and was injured when he or she fell off.

Site insurance covers against all other risks, including fire, flood, theft from the site, vandalism etc. Not surprisingly, most self-builders insurance claims are in respect of these risks. In particular, the theft of building materials from sites is now very common, especiallly when they are stacked outside immediately after delivery and before they have been fixed.

Fortunately all three types of insurance are covered by a single 'all risks' self-build policy underwritten by Norwich Union and available through DMS Services Ltd. Full cover for a project with a replacement value of 80,000 will cost around 440. Cover should be arranged as soon as the site is purchased.