Our VAT guide for landlords and property investors and how you could claim refunds on property development work carried out.
When discussing VAT (Value Added Tax) rules concerning residential and investment properties, the rules can be complex. As the letting of the building is exempt from VAT a residential landlord as such doesn't need to worry about VAT.
However, landlords and property developers may be able to claim VAT on property development if they have paid it on building costs and materials for renovation works they have carried out.
In the UK, there are three different rates of VAT. The standard rate of VAT is 20%, but there is also a reduced rate which is 5% and a zero-rate. Reduced rate and zero-rate VAT are applicable in specific circumstances.
As a general rule, if a supply is Vatable at any of the three rates, you can claim back any VAT you have paid out to suppliers. If the supply is exempt from VAT, you cannot claim back any VAT you have paid. Any activity you carry, which is zero-rated will benefit property developers the most. Making sure you fully understand what you can and can't claim when it comes to VAT on property development is very important.
If you are looking to convert a residential property, it can take time and be a long-drawn-out process. It is important to make sure you factor in the costs and tax issues before you start so you can know exactly what you can expect to pay out with regards to VAT for residential property developers.
Knowing where you stand and what VAT on property development, you need to pay can help you determine how to go ahead and what you can expect to pay during your renovation.
New residential buildings and those that are partly constructed fall into the zero-rated tax bracket. This bracket will apply to those developments where a developer turns a commercial property into a residential property.Other zero rated cases are in the instance of a grant of a lease for more than 21 years. The first payment or premium payment will be zero rated and all subsequent payments are fully exempt.
When constructing or converting a building in relation to the zero rating of the first grant mentioned above, this will apply slowly to the person constructing or converting the building but it can be used by more than one person if this is different from the developer.
When claiming VAT paid on costs incurred on zero rated projects, developers are entitled to claim full recovery.
If you need to carry out any refurbishment or repair work on a property you let, you will have to bear the cost of any additional VAT. This includes accountancy or legal costs too. If you can pass any of these costs onto the tenant, then you may be able to claim back VAT costs as detailed in the following section.
One option available to property investors is to opt into tax a commercial building. If you choose to opt in to tax a building, VAT must be charged on any rent, leases or sales of the property in the future. Once you have made this decision, you must inform HM Revenue and Customs of your decision within 30 days. It is recommended you use the VAT1614A form to inform them of your decision.
You can choose to opt-in one property, all of your properties, properties in a specific location. You can also choose to exclude certain properties. Once you have chosen your option, this will then apply to the land the building is on; meaning if the building was demolished or more properties are added, this option still stands unless specifically excluded by the owner.
Residential conversions can benefit from reduced VAT rating of 5% in some cases. The reduced rate includes the supply of qualifying services and the materials supplied with those services too. Materials supplied separately of accompanying services will be at the standard rate.
For property developers simply refurbishing and redecorating properties, the standard rate applies. For larger, more complex renovations such as turning a commercial property to a residential property, changing the number of dwellings from one unit to more or from multiple dwellings to a single let unit i.e. flats into one single residence will benefit from the reduced rate.
VAT on residential properties isn't payable meaning, as a property developer or a residential landlord, you won't have to worry about VAT unless your income is above the £85,000 threshold. For the majority of residential landlords, VAt won't be something they need to think about whether you rent out a single dwelling or HMO.
If you supply extra services such as a gym, laundry or cleaning services, then these are potentially taxable services, and you could be able to claim back VAT on services offered. For this reason, if you offer these services, you may want to consider registering for VAT.
One particular letting option which is not exempt is serviced accommodation. So if you plan to use your property as a holiday rental accommodation, 20% VAT needs to be invoiced to the dweller to account for this. However, should your income from serviced accommodation come under the VAT threshold, you will be exempt from registration. It is vital to get qualified legal advice retaining VAT to make sure you are following legal requirements as fines and penalties issued can be hefty.
Choosing to list your rental property as an Airbnb applies to the same VAT regulations as other holiday rentals and as such, are included in the 20% VAT bracket. Making sure you are properly registered is vital should you be using your property to rent out via sites such as Airbnb.
If you are a developer of other types of accommodation such as care homes, student housing etc, you will be subject to the same VAT rules as developers in the build to rent sector.
VAT recovery in these sectors can cause some issues. The category your building falls under will determine the VAT recovery. Issues can arise when student letting is used for short term lettings during the times when students are away for holidays or the end of the school year, for example. Remember, VAT recovery for these types of properties take into consideration the ten years following the completed works.
Contact us to find out more about VAT on residential property and VAT on property development.