Renovate or rebuild?

The decision to do up an old wreck or knock it down and start again is influenced by more than simple aesthetics. Tax breaks and maintenance costs could sway your choice.

The decision to do up an old wreck or knock it down and start again is influenced by more than simple aesthetics. Tax breaks and maintenance costs could sway your choice

IT'S A CLASSIC conundrum: you find a run-down property in a perfect location with tons of potential, and you long to turn it into the home of your dreams. But do you get there by renovating and extending, or would you be better off knocking it down and rebuilding from scratch?

Certainly the trend to demolish habitable houses and replace them with something better has been increasing in recent years, particularly in high-value areas where space is at a premium, such as coastal locations. At first glance, the destructive approach may not look sensible, as you're paying for the house that's already there, plus the cost of building the new house. And that can only make sense if you're going to end up with a property worth more than all that outlay.

If the existing property's a wreck, then the decision to knock down is more tenable because you should have paid a lot less to acquire it. But before you make any decision, there are quite a few things to consider.

The period is a good starting point. 'Victorian and Edwardian houses work well for renovation because they have a lot of circulation space and you can usually retrofit some improvements such as underfloor insulation,' says Jane Henshaw, partner in building surveying at Strutt & Parker. 'Bungalows, particularly of post-war construction, lend themselves much more obviously to being replaced.'

Demolishing a property will typically cost three to five per cent of the total budget, says Henshaw. And don't expect to claw back any significant amount from recycling or reclaiming materials.

Then there's the question of VAT: the different rates for new-builds and renovations are often cited as an argument in favour of demolishing and rebuilding. It's a complex area, so employ a consultant to check your entitlements and to avoid having to pay unnecessary tax. In broad terms, you pay VAT on renovations, but not on new building, and at 20 per cent that could have a significant impact on your budget. Under a DIY housebuilders scheme, HM Revenue & Customs (HMRC) allows you to reclaim the VAT you pay on building materials for a new-build, while you can avoid paying VAT on the construction by getting the builders to zero-rate their work when they bill you. For a rebuild to qualify as a new-build it has to meet HMRC's criteria: namely that you demolish to ground level.

Renovations can also qualify for some VAT relief. If the property has been unoccupied for two years prior to renovations commencing, you pay a reduced rate of five per cent VAT, so, as Helen Carey of Constable VAT Consultancy points out: 'It may even be worth delaying the renovation work to meet that condition.'

And if it's been empty for more than 10 years, you may be able to reclaim VAT via the DIY scheme. There is also further VAT relief for alterations to listed buildings and for conversions of non-residential properties to dwellings. But Carey points out: 'If you are making a DIY housebuilder claim, and you have paid VAT at the wrong rate there is no opportunity to claim it back – so you should always make sure you pay at the correct rate to begin with.'

Jane Henshaw says building costs and taxes are only part of the equation. 'I would argue that you look at the whole life costs of each solution. What that means is that if your existing house has timber windows, you evaluate the cost of painting every three years and replacing after 20, while your new building might have UPVC with little ongoing cost. And energy is another factor: existing buildings tend to have poor thermal performance, while new-builds are highly insulated.' A quantity surveyor can do the sums for you.

On balance, though, she believes people who opt to renovate are often making a mistake. 'For one thing it's quite common to underestimate the cost of renovation. But people often buy a crummy house with a view to demolishing and rebuilding, then get stuck on planning, and start to think they could make the property work as it is. I think it's a mistake – if you start out with a vision about living in a modern, low-energy home, you should stick to your plan.'

Contacts

Strutt & Parker Surveying
(01273 407 024; struttandparker.com)

Constable VAT Consultancy
(020 7830 9669; ukvatadvice.com)

HMRC DIY housebuilding scheme
(0845 010 9000; hmrc.gov.uk)

Building Cost Information Service
(020 7695 1500; bcis.co.uk)

Words: Alexander Garrett

Illustration: Nick Edwards


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