The Rules Every Property Investor Should Know
VAT and property can be a particularly complicated combination. Unlike many areas of property taxation, the VAT treatment can change depending on whether you are buying, selling, developing, renovating or letting a property.
Getting the VAT treatment wrong can be expensive, particularly where a project involves significant construction or refurbishment costs.
We discuss below some of the key VAT points property investors should be aware of.
The biggest VAT mistake is looking at the VAT after the work has started
With property projects, VAT planning is often most valuable before the first invoice is received.
Once you’ve:
- Signed the building contract
- Purchased materials
- Started the works
- Opted to tax
- Agreed the property purchase
it may be too late to restructure the arrangement.
A difference between 0%, 5% and 20% VAT on a £300,000 construction project could represent tens of thousands of pounds.
That’s why we recommend getting the VAT position established before committing to the project.
Residential property letting is normally VAT exempt
If you own a property and let it to a tenant as a normal residential property, the rental income is generally exempt from VAT.
This means you would not normally charge VAT on the rent.
However, there is an important consequence: because residential letting is exempt, the VAT you incur on costs relating to the property is generally not recoverable.
This is why it is important to consider VAT before undertaking major works.
Building a new property? You may be able to pay 0% VAT
One of the most valuable VAT reliefs for property investors is the 0% VAT rate on qualifying new residential dwellings.
Where the conditions are met, the construction of a new house or other qualifying dwelling can be zero-rated.
This can apply to:
- New houses
- Flats
- Certain other self-contained dwellings
- Certain developments involving the complete demolition of an existing building
The 0% rate can apply to qualifying construction services and qualifying building materials supplied and incorporated by the contractor.
Importantly, the fact that you intend to retain the property and rent it out as a long-term BTL does not, by itself, prevent the construction from qualifying for 0% VAT.
HMRC’s conditions must, however, be carefully considered before the project starts.
Who buys the materials can make a difference
This is an area where property investors can inadvertently create an unnecessary VAT cost.
If your builder is carrying out a qualifying zero-rated construction project and the builder purchases and incorporates the building materials, those materials can generally be included within the builder’s zero-rated supply.
If instead you purchase the materials yourself, the supplier will generally charge VAT at 20%.
For example:
Builder purchases materials
£100,000 materials
VAT £0 charged to you where the materials form part of the qualifying zero-rated construction supply.
You purchase materials directly
£100,000 materials
£20,000 VAT
That £20,000 may not be recoverable, particularly where the completed property will be used for VAT-exempt residential letting.
The contractual structure and who is making the supply therefore matter.
Renovating an existing property
The VAT treatment of renovation work is different from new-build construction.
Certain residential renovation and conversion projects may qualify for the reduced 5% VAT rate, but this is subject to specific conditions.
For example, certain works to properties that have been empty for a qualifying period may qualify for 5%.
There are also specific rules covering:
- Conversions into multiple dwellings
- Certain conversions of commercial buildings into residential accommodation
- Properties that have been unoccupied for the required period
- Certain residential renovation projects
However, not every renovation qualifies for 5% VAT.
The fact that a property is old, run-down or requires substantial work does not automatically mean that the 5% rate applies.
Empty property does not automatically mean 5%
We often see investors assume:
“The property has been empty for two years, so all the work is 5% VAT.”
Unfortunately, it isn’t quite that simple.
The type of work being carried out, the history of the property and how the project is structured all need to be considered.
Some works may qualify for 5%, while other works on the same project may remain subject to 20%.
It is therefore worth establishing the VAT treatment before agreeing the price with your contractor.
Holiday lets and serviced accommodation
Holiday accommodation can have a very different VAT position from ordinary residential BTL.
Certain supplies of holiday accommodation can be standard-rated for VAT.
This means that if you operate a VAT-registered holiday-let business, there may potentially be VAT to charge on the accommodation income, but there may also be an opportunity to recover VAT on related business expenditure.
The precise position depends on the nature of the accommodation and how it is operated.
This is one area where it is particularly important not to assume that a property being described as a “holiday let” automatically gives the same VAT treatment as a normal residential rental.
Commercial property
Commercial property has another set of VAT rules.
The sale or letting of commercial property is generally exempt from VAT unless the owner has opted to tax the property.
An option to tax can result in VAT being charged on rents and potentially on the sale of the property.
However, opting to tax is a significant decision and can have long-term consequences.
Before opting to tax, you should consider:
- Who your tenants are
- Whether they can recover VAT
- The intended future use of the property
- The VAT position on a future sale
- Whether the option can be revoked
- The VAT recovery position on development expenditure
Buying a property with VAT
VAT can also arise when purchasing property.
For example, a newly constructed commercial property may be sold with VAT, while a residential property will generally not have VAT charged on the purchase.
The interaction between VAT and SDLT can also be important because, where VAT is payable on a property transaction, the VAT-inclusive amount can affect the SDLT calculation.
This is another reason why the VAT position should be established before exchange of contracts.
Our property tax tip
If you are planning a:
New build • Conversion • Renovation • Property purchase • Commercial development • Holiday-let project • Property sale
don’t just ask:
“How much will the work cost?”
Ask:
“How much will the work cost including VAT?”
And, more importantly:
“Is the VAT treatment correct?”
Getting the answer before you start can make a significant difference to the overall cost and profitability of a property investment.
Need advice on a property project?
Give us a call 01904 948860, or drop us an email tax@calculateduk.com
