VAT on residential property

Simon Misiewicz

Simon Misiewicz

Expat & Property Tax Specialist

13th June 2022

VAT on residential property

VAT on residential property is zero-rated when it has first been constructed.

This also covers a partly-constructed residential property, provided it is under construction.

VAT on rental income is exempt.

The VAT exemption applies whether the residential property is single-let, HMO or residential letting.

Serviced accommodation is not exempt, so there is VAT on rent, and it is standard rated.

What are the basics of VAT on residential property?

As property accountants serving thousands of UK landlords that purchase buy-to-let investments, we know that VAT on residential property is a topic many find confusing and complex.

The process of choosing to pay VAT on rent or VAT on rental income can be a daunting prospect for many landlords to navigate.

When charging rent for the supply of land or building space, the supply element is VAT exempt.

This is the case even if your property business is VAT registered.

If you are not VAT registered, then exempt supplies do not count towards the VAT threshold.

Any VAT-registered buy-to-let business can charge VAT on rent supplies by ‘opting to tax’.

If you wish to do this, HMRC should be notified within 30 days, using Form VAT1614A.

Adding VAT on rent and VAT on a commercial property or Furnished Holiday Lettings (FHL)/AirBnB rental income can be included but if services are provided along with the space, then this does not apply.

Services could be equipment, booking facilities, reception service, or anything that isn’t just using the space itself.

If services are included, VAT must be charged if you are VAT-registered with no option to tax needed.

If services are included, the whole amount counts towards the VAT threshold if you are not VAT-registered.

VAT on residential property is an area where expert advice is highly recommended for UK landlords.

Is VAT charged on rental income in the UK?

Income from residential property (except Furnished Holiday Lettings or AirBnB) is exempt from VAT.

Income on commercial property is also exempt from VAT unless you provide a service or opt to tax.

If trading as a sole trader or in a partnership and owning your rental property in the same capacity, your rental property may affect whether you should be VAT-registered.

You must register for VAT if the turnover from your trade plus rent from your commercial property where you have opted to tax plus income from Furnished Holiday Lettings / AirBnB in the last 12 months exceeds the registration limit of £85,000.

It is worth reading HMRC guidance to determine when transactions involving land and property are exempt from VAT by using VAT Notice 742.
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Is VAT paid on commercial property?

You will have to pay VAT on the full purchase price if you buy a new commercial property.

You may also have to pay VAT on a second-hand commercial property.

Unlike VAT on residential property, rents on commercial property are exempt from VAT unless you opt to tax.

If your tenant is VAT-registered and makes only standard-rated supplies, then there is no loss to them (apart from cash flow) if they have to pay VAT on rent.

You can then claim the VAT you have suffered on the building and any expenses incurred.

There are ways of reducing VAT on property development that are worth reviewing.

There are many types of commercial property that you can purchase:

– Shops

– Restaurants

– Offices

– Warehouses

You could purchase a commercial building, which you can use for your own business. It is also possible for you to purchase a commercial building that you part use and rent out the remaining parts to earn commercial property rental income.

What VAT is due on Furnished Holiday Letting (FHL) & AirBnB?

Furnished holiday lettings (FHLs)/ AirBnB is considered a standard-rated VAT supply. FHL/AirBnB are considered to be residential property and not commercial. This is because people sleep at night in this type of property meaning it has a residential (sleepover) arrangement.

This should not be an issue when it comes to VAT on a residential property unless you have other taxable supplies in the same legal capacity or the gross income is above £85,000.

So if you and your spouse were in a VAT-registered business partnership and owned the property jointly, you would have to allow for VAT on the FHL income, but you would be able to claim any input VAT on the expenses.

If you are not VAT-registered and your supplies, including the FHL income, exceed £85,000 in 12 months, you must register for VAT and charge VAT on rental income.

It is also worth understanding the tax benefits of furnished holiday lettings. It is possible to have commercial property elements in an FHL/AirBnB such as a shop, restaurant or dry cleaning services as an example.

How do I remove VAT when purchasing commercial buildings for residential purposes?

If you are purchasing a commercial property on which the sale price includes VAT but for which you will convert to residential property by flipping or renting immediately, you can seek to use a Form1614D with the seller.

The purchase of a commercial building less than three years old will still carry the 20% VAT charge.

The seller may need to make a VAT adjustment if they have accounted for VAT on the building under the Capital Goods Scheme for you to benefit from Form 1614D.

It is unlikely that the seller will accept Form1614D if they sell the building within 10 years of using the Capital Goods Scheme, as they will have to pay the VAT back.

Signing Form1614D must be done early in the sale negotiations as this relief cannot be gained retrospectively after the building purchase.

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What are the VAT rules for property conversions?

When you convert a property not currently used for residential purposes, such as a barn or pub, the VAT rules are more complex.

Your sale may be exempt or zero-rated or a mixture of the two, depending upon what is converted.

This VAT liability will determine how much VAT can be recovered.

There is a 5% reduced VAT rate that applies to some conversions.

Many construction contractors try and charge the standard rate of 20% on all the projects, as the VAT rules are complex.

Commercial property conversions, including pubs, are further complicated by the VAT treatment of the sale of the building to the person converting it.

The commercial building may be purchased as a VAT-free transfer of a going concern (TOGC), or part may have been treated as VAT exempt if there is living accommodation above.

Is it worth converting a commercial property into a residential one?

A lot of our landlord clients like converting commercial into residential use because of the Stamp Duty Land Tax (SDLT) and VAT savings that can be made.

Need advice?
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