Value Added Tax (VAT) is a key area that landlords of both residential property and commercial property in the UK need to understand.
The rules on VAT for commercial property and residential property are different, so landlords need to understand what can often be, complex tax rules to ensure they charge the right amount of VAT on leasing out property.
In this blog we will cover the basics around VAT registration and also the different rules for commercial premises and residential property.
There isnt a simple answer to this question, so read our extended advice below as VAT rules for different types of property can be complicated.
Generally, income from residential property except furnished holiday lettings is exempt from VAT. Income on commercial property is also exempt from VAT, unless you provide a service or you elect to opt to tax (see below).
If you are trading as a sole trader or in a partnership and own your rental property, then your rental property and income may affect whether you should be registered for VAT. You must register for VAT if the turnover from your trade plus rental income from your commercial property (where you have opted to tax) or income from furnished holiday lettings exceeds the £85,000 VAT registration threshold. It may be advantageous for you to voluntarily register for VAT even if your income or turnover is below the threshold, depending on the type of property (read our advice below).
Do I need to register for VAT?
Some businesses have to register for VAT, some dont, and others can choose.
- Who must register for VAT: Businesses with an annual taxable turnover of more than £85,000 have to register for VAT. You may be fined if you don’t register.
- Who can choose to register for VAT: Businesses with an annual taxable turnover of less than £85,000 can opt to register for VAT as there can be some benefits to this.
Business with turnover less than the VAT registration threshold of £85,000 are not required to register for VAT but can opt to voluntarily register for VAT. There can be some benefits to voluntary registration for VAT as it allows you to recover input VAT paid to suppliers. However, depending on your types of tenants, they might be reluctant to pay extra VAT as it will increase their costs. So voluntary registration needs to be carefully thought out. Seek professional advice from tax accountants such as dns accountants.
VAT rules can be complex, so whether a property owner with residential or commercial properties should be registered for VAT depends on certain circumstances, and should seek professional advice as to if it is tax beneficial to be VAT registered. Even if there is an option to tax on the building, removing the option to tax may be more beneficial (see below).
Serviced accommodation businesses with rental income over £85,000 must register for VAT.
Landlords with properties on an Assured shorthold tenancy agreement (AST) have exempt supplies, so are outside the scope of VAT and have no requirements or benefit to register for VAT due to being VAT exempt.
How long does VAT registration take for property?
Where there is a need to register for VAT (i.e. you are approaching or exceeding the VAT threshold) then VAT registration is required within 30 days of exceeding the threshold. It is wise to consider registering for VAT before you reach the threshold or the 30 day period. Registration can take 10 to 14 days and here at dns accountants, we can help you with the process of registering for VAT as well as submitting VAT returns.
VAT on residential lettings
Most residential property landlords don’t need to worry about VAT because residential letting is exempt from VAT. The exemption applies whether it is single-let, HMO (House in Multiple Occupations) or a normal residential letting.
However, serviced accommodation (i.e. holiday lettings such as Airbnbs) are not exempt and are standard rated.
VAT on serviced accommodation
20% VAT is charged on serviced accommodation as it is a taxable supply. If your property business rents out serviced accommodation and its turnover is more than VAT registration threshold of £85,000, then you must register for VAT.
VAT on a new residential development
New residential developments are zero-rated for VAT so that property investors can claim back the VAT paid to suppliers for the development work. In this case, it is worth registering for VAT.
For example, if you spent £500,000 on a property development project which includes £100,000 of VAT, you can claim back £100,000 VAT from HMRC. However, the rules can be complicated, so seek professional advice.
To be eligible for zero rating, the supply should be first grant of a major interest of dwellings. A major interest is a freehold or leasehold estate. A major interest for these purposes does not include a lease with a term of seven years or less. Construction of dwellings, student accommodation and care homes generally qualify.
Do I charge VAT on holiday lettings??
Income from self-catering holiday accommodation falls within the scope of VAT, so if the gross income from your trade and your furnished holiday let (FHL) exceeds the VAT threshold of £85,000, it is compulsory to register for VAT.
The income from property that qualifies as UK holiday accommodation will be standard rated for VAT at 20%. This assumes that the property is not let out on a long-term residential basis, but as short-term, furnished sleeping/holiday accommodation for visitors.
VAT on property conversion
Property developers that convert properties can benefit from generous tax relief from HMRC.
1. VAT on commercial to residential conversion
Conversion of commercial buildings to residential (for example office buildings to apartments, shops to houses, barns to residential homes) qualify for a 5% reduced rate of VAT in relation to the conversion costs. But when the first major interest is granted, it will be zero rated giving full VAT recovery.
Building materials supplied separately to the contract for the conversion will be charged at 20% standard rate but you will recover that VAT.
2. VAT on a change in the number of residential dwellings
A reduced rate of VAT at 5% is applicable when conversion changes the number of dwellings in a property. For example, conversion of a house into flats will be eligible for reduced rate.
3. VAT on conversion into House in Multiple Occupation (HMO)
The conversion of single occupancy dwelling to multiple occupancy dwelling qualifies for the reduced rate of VAT of 5%. So, for example if you convert a four-bedroom house to an HMO, the conversion work qualifies for the reduced VAT rate.
VAT on commercial property
The lease or sale of a commercial property is usually exempt from VAT. This means that the future tenant or person buying the property doesn’t have to pay VAT on the transaction. This reduces the cost of buying or renting a commercial property. However, it means that the landlord or commercial property buyer cannot recover the VAT on all related costs.
Do you charge VAT on commercial property rent?
Although most commercial properties are VAT-exempt, landlords can charge standard rate VAT for rental income. This is called the right to opt for tax. See more detail below.
If they charge VAT on rent, they must also charge VAT for all other costs linked to a commercial lease, such as periodic maintenance fees. This can benefit landlords by allowing them to reclaim any VAT charged to them relating to the premises. For example, a commercial landlord could reclaim VAT charged on the associated costs to tenants for a property’s refurbishment.
VAT option to tax for commercial property owners
Whenever there is an exempt supply of commercial land or buildings, the owner has the option of changing it to standard-rated supply by making an option to tax election. By doing this, the VAT paid by the landlord on regular expenses & building work can be recovered from HMRC.
The option can be made for individual buildings and does not have to apply to a whole property portfolio.
For example, if you purchased a new commercial building for £500,000, standard VAT at 20% would apply from the developer, meaning you would pay £100,000 in VAT. If you opt to tax, you can recover the £100,000 of VAT you paid. In circumstances like this it may be advisable to elect for ‘option to tax’.
However, you need to consider what you intend to do with the property long term. For example if you intend to rent the property out to small businesses, then you will need to charge VAT on the rent, and this may increase costs for small businesses that are not VAT registered and be a barrier to rental. If you will be renting to the property to larger businesses that are also likely to be registered for VAT, they it wont affect those larger business tenants as they can recover VAT charged to them.
An option to tax can take effect immediately. A form (VAT1641a) needs to be lodged with HMRC within 30 days of the election.
New commercial property
Sale of freehold in an uncompleted or new commercial building is standard rated at 20% VAT. If you sell newly constructed commercial building with freehold, you need to charge 20% VAT.
However, lease of a commercial property or old commercial building (older than 3 years) are not taxable unless an option to tax election is made (see above).
Transfer of going concern (TOGC)
A Transfer of Going Concern (TOGC) is the sale of a business and any assets (i.e. property) relating to that business, and sits outside the scope of VAT so, no VAT charged on the sale. Conditions to be a TOGC:
- It is a transfer of a whole business as a going concern (i.e. with a tenant in situ)
- There is no change in trade
- There is no significant break in trade
- The transferee is, or will immediately become VAT registered after the transfer
As you can see from the content above, the rules around VAT on both residential and commercial properties and property rental can be complex. In some circumstances you must register for VAT and for some property owners it may be beneficial to register voluntarily for VAT or opt to tax. Our advice in all circumstances is to seek the help and advice of tax professionals such as dns accountants. We have VAT and property experts in our team who can advise you on the best course of action around VAT and tax planning for your property portfolio.
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