VAT on property: rules for landlords, buyers and developers

Property sits awkwardly in the VAT system. Most land and buildings are exempt, but there are important exceptions, and one choice made by an owner, the option to tax, can change the VAT on a building for 20 years. Getting it wrong on a commercial purchase can add 20% to the price or leave VAT unrecoverable.

Residential property

Because residential lettings are exempt, a buy-to-let landlord does not charge VAT on rent and cannot reclaim VAT on repairs, letting agents’ fees or other costs. The VAT simply becomes part of the cost of the business. The option to tax cannot be used to change this: it has no effect on dwellings.

Developers are in a different position. Because the first sale of a new home is zero-rated, a developer can register for VAT and reclaim the VAT on its construction costs. See VAT on new builds and construction for the rates on the building work itself.

Holiday lets and serviced accommodation

Holiday accommodation, including furnished holiday lets and short stays in serviced apartments, is standard-rated, not exempt. The income counts towards the £90,000 VAT registration threshold. Many owners of several holiday lets, or of a single high-earning property, are required to register and charge VAT on their bookings.

Commercial property

The default position for commercial property is exemption:

• the sale of the freehold of an older commercial building is exempt
• the grant of a lease of commercial property is exempt
• the sale of bare land is exempt

Several supplies are always standard-rated whatever the owner chooses, including:

• the freehold sale of a new commercial building, meaning one completed less than three years before the sale
• car parking, storage space and self-storage
• hotel and holiday accommodation
• sports facilities, in most cases
• rights to fell timber and certain fishing and shooting rights

The option to tax

An owner of commercial property can opt to tax it. Once the option is in place, sales and rents of that property are standard-rated, and the owner can reclaim the VAT on buying, refurbishing and running it.

Owners usually opt to tax because:

• they bought the property with VAT charged and want to reclaim it
• they are spending heavily on refurbishment
• their tenants are VAT-registered businesses that can reclaim the VAT on rent, so it costs them nothing

The practical rules:

• The option is made on a building-by-building basis and must be notified to HMRC within 30 days, usually on form VAT1614A.
• It normally lasts 20 years. It can be revoked within six months of being made if no tax consequences have arisen, or after it has been in place for 20 years.
• It does not apply to dwellings, or to buildings used for a relevant residential or charitable purpose.
• Tenants who cannot reclaim VAT, such as banks, insurers, charities and medical practices, bear the extra 20% on rent, so opting to tax can make a building harder to let to them.

Before buying or leasing commercial property, ask whether the seller or landlord has opted to tax. It determines whether VAT is added to the price or rent.

Transfers of a going concern

The sale of a commercial property that is let to tenants can be treated as the transfer of a going concern (TOGC). A TOGC is outside the scope of VAT, so no VAT is charged even if the seller has opted to tax. This saves the buyer funding 20% of the price, and the stamp duty that would be due on the VAT.

For a let property, the main conditions are:

• the property is let, and the buyer will continue the same letting business
• if the seller has opted to tax, the buyer must also opt to tax and notify HMRC before the relevant date, usually exchange or completion
• the buyer must tell the seller that its option will not be disapplied
• the buyer must be VAT-registered, or required to be, by the date of the transfer

Missing a condition, often the timing of the buyer’s option, means the sale is standard-rated. Get the VAT position agreed in the contract and confirmed with advisers well before completion.

The capital goods scheme

If you buy or build a property costing £250,000 or more (excluding VAT) and reclaim VAT on it, the capital goods scheme applies. The VAT you recovered is adjusted over ten intervals, roughly ten years, if the taxable use of the building changes. A business that moves from taxable to exempt use, for example by letting the building to an exempt tenant without an option to tax, may have to repay part of the VAT it reclaimed.

Service charges and other costs

Service charges paid by tenants generally follow the VAT liability of the rent: standard-rated where the landlord has opted to tax, exempt where it has not. Charges for separate optional services, such as a tenant-only gym, may be treated differently.

Frequently asked questions

Do landlords charge VAT on residential rent?

No. Letting a home on a long-term basis is exempt, so residential landlords do not charge VAT and cannot reclaim VAT on their costs.

Do I pay VAT when buying a commercial property?

Only if the seller has opted to tax it, or the building is a new commercial building less than three years old. If the property is let and the sale qualifies as a transfer of a going concern, no VAT is charged.

What is the option to tax?

An election by a property owner to make sales and rents of a commercial building standard-rated, allowing the owner to reclaim VAT on related costs. It is notified to HMRC and normally lasts 20 years.

Do holiday lets have to charge VAT?

Holiday lets are standard-rated. If your total taxable turnover, including holiday letting income, exceeds £90,000 in a rolling 12-month period, you must register and charge VAT.

Can I reclaim VAT on repairs to my buy-to-let flat?

No. The rent is exempt, so VAT on costs relating to residential lettings cannot be reclaimed.