Property VAT made simple

When you mention tax and the property market, people automatically assume you are talking about SDLT (stamp duty land tax). However, many people are unaware that value-added tax (VAT) is a factor in many property transactions.

When you mention tax and the property market, people automatically assume you are talking about SDLT (stamp duty land tax). However, many people are unaware that value-added tax (VAT) is a factor in many property transactions. Introduced back in 1973, when the UK joined the European Union, VAT is the UK government’s third-largest source of revenue after income tax and national insurance. However, what should have been a relatively simple system has become highly complicated. So how does VAT relate to the property market?

Before we look at the various scenarios regarding property and VAT, it is essential to note that a VAT exemption will likely mean you have to reclaim the VAT from HMRC. Consequently, you may pay the VAT initially and then need to reclaim it, potentially impacting cash flow.

Residential and commercial property

There are two distinct areas to consider when looking at VAT in the property market, residential property and commercial property. The rules relating to VAT are very different, and you must be aware of potential liabilities. As we are talking about a possible 20% increase in your budget if VAT is charged, it is crucial to know the situation before you start.

Residential property

When considering the impact of VAT on residential property activities, it can become relatively complicated. We will now look at some of the more frequently asked questions when it comes to residential property and potential exposure to VAT.

Buying and selling residential property

This is one of the more straightforward scenarios. VAT is not charged when buying and selling residential property. Depending on the scenario, the buyer may be liable to SDLT, but there is no exposure to VAT. However, if you use the services of an estate agent or other service provider, their fees will attract VAT.

Demolition and/or rebuild of residential property

When demolishing an entire residential property to ground level, the costs incurred are exempt from VAT as is the rebuild budget. However, when only demolishing a part of the property, it may be open to interpretation regarding the retention of a facade. This relates to whether the subsequent rebuild is classed as an alteration, enlargement or extension to the remaining structure. If so, there would be no exemption, and VAT would be charged on services and materials.

On a similar tack, the cost of materials and labour is also VAT exempt on new build properties, as is a subsequent sale.

Renovating a residential property

As a general rule, all products and services are charged at 20% VAT unless specifically exempt. Consequently, an individual carrying out renovation work on their own home would be eligible for full VAT on materials and services. There may be scenarios where VAT is reduced, which include:-

  • Installation of energy-saving material
  • Installation of grant-funded security/heating systems
  • Installation of mobility aids for the elderly
  • Renovation of a property which had been empty for two years

If a residential property has been empty for at least two years, you would be eligible for a VAT reduction from 20% to 5%. This would cover the cost of labour and materials, although not everyday items such as televisions, carpets, etc. The government introduced this VAT reduction to encourage the renovation of previously empty residential properties.

Converting non-residential property into dwellings

On the subject of renovations, there are VAT exemptions for those looking to convert non-residential property into dwellings. However, there are conditions attached:-

  • The building has never been used as a residential dwelling

OR

  • The building has not been used for residential purposes in the previous 10 years

In this scenario, the developer can claim back all VAT when the property is sold. Alternatively, if the homeowner retains this as a private residence, they can claim VAT under the DIY Builders Refund Scheme.

Commercial property

As you might expect, the VAT landscape is very different for commercial property, and there are several issues you need to be aware of. We will now look at some of the more common scenarios regarding commercial property and potential VAT liability. However, before we look at different scenarios in detail, there is one issue to consider, opting to tax a property.

Opting to tax

Except for new commercial properties less than three years old, normally, VAT is not part of the sale price. Therefore, in a typical scenario, the property is seen as an exempt supply when it comes to VAT. This prompts the question, why would you opt to make a property a taxable supply?

The answer is simple; you are converting an exempt supply into a taxable supply to recover VAT related costs. Opting to tax is especially useful if you rent out commercial property. While you will need to charge VAT on rents to the tenant, you would be able to reclaim VAT on the purchase, ongoing expenses and related professional charges.

You can only revoke the option to tax on a building in limited circumstances such as:-

  • 20 years after the option to tax was exercised
  • Within a six month cooling-off period, assuming no input tax has been claimed or output tax charged
  • The buyer has no interest in the property after six years, e.g. you opted to tax the property before purchase, only for the deal to fall through

If you own several properties, the option to tax is not a blanket condition and can be carried out on individual buildings. However, there are pros and cons concerning this option, and it is vital to take advice from your accountant.

 

Purchase of a commercial property

The purchase of commercial property and the exposure to VAT can get a little complicated. We will therefore attempt to simplify this by reviewing various scenarios.

Purchase of new commercial building
The purchase of commercial premises deemed “new”, i.e. less than three years old will incur a 20% VAT charge on the sale price.

Purchase of established commercial building
Where you buy established commercial premises, i.e. at least three years old, usually there is no VAT to pay on the purchase price. However, where the property has been “opted to tax”, VAT will be charged at the standard 20% rate.

Purchase of opted to tax commercial building
Under normal circumstances, where a commercial building has been opted to tax, VAT will be charged on top of the sale price. However, the situation is different where the property is part of assets sold with a going concern business. The asset sale is deemed neither a supply of goods nor a supply of services – consequently falling outside the scope of VAT. In this scenario, VAT would not be applied to the property sale price.

Sale of a commercial property

If a commercial property has not been opted to tax and is not less than three years old, there won’t be any VAT to pay. Where the buyer of a commercial property has opted to tax, they would usually be forced to charge VAT on any future sale. However, there are some scenarios where a buyer can disapply the seller’s option to tax.

In this scenario, the property would become exempt for VAT purposes but only in the following circumstances, where the property is to be:-

  • Adapted for use as a dwelling
  • Converted into another residential building, e.g. care home or student accommodation
  • Used for charitable purposes
  • Sold to a housing association
  • Used as a caravan pitch
  • Used as a houseboat mooring

It is not difficult to see the potential benefits for the buyer, i.e. a reduced purchase price. However, the seller could have significant financial consequences, as they would not be able to reclaim VAT incurred in relation to the transaction. In addition, they may have to pay back an element of VAT they have claimed in the past.

Implications for SDLT

There may be a potential knock-on effect to the SDLT charge depending on whether a building is opted for tax or not. As SDLT is charged on the gross sale price, whether or not VAT is applied can significantly affect the SDLT charge.

Understanding property VAT

We have touched on several scenarios where VAT may be charged and the potential knock-on effects on various parties. There are obvious pros and cons, but you must take professional advice before either opting for tax or buying a property already opted for tax. Failure to do so could prove very expensive!

Sources:-

https://www.stephensons.co.uk/site/businesses/srvrealestate/property-guides/vat_property_transactions/

https://druces.com/reduced-vat-rate-residential-property/

https://www.diydoctor.org.uk/projects/renovation-conversion-vat.htm

https://renovateme.co.uk/blog/reduced-vat-for-renovation/

https://www.gov.uk/guidance/buildings-and-construction-vat-notice-708 – reduced-rating-the-renovation-or-alteration-of-empty-residential-premises

https://www.thecpa.co.uk/news/vat-free-home-improvements/

https://www.self-build.co.uk/question/reclaiming-vat/

https://www.gov.uk/guidance/buildings-and-construction-vat-notice-708

https://www.gov.uk/guidance/construction-services-and-zero-rated-relief-vat-information-sheet-0717

https://www.no-use-empty.org.uk/advice-and-guidance/property-tax-and-vat/reduced-vat-schemes/

https://www.taxinsider.co.uk/vat-what-is-the-option-to-tax-and-why-would-you-do-it

https://www.taxinsider.co.uk/revoking-the-option-to-tax-after-years-ta

https://www.etctax.co.uk/knowledge_centre/disapplication-of-an-option-to-tax-seller-beware/

https://pkffpm.com/trending-topics/revoking-option-to-tax/

https://www.gov.uk/government/publications/vat-revoking-an-option-to-tax-after-20-years-vat1614j

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