Understanding VAT on Property Transactions

VAT on property transactions in the UK can be complex, with different tax treatments depending on the nature of the property (commercial or residential), its use, and other factors. Transactions can fall into various categories: outside the scope of VAT, exempt, zero-rated (0%), reduced-rated (5%), or standard-rated (20%). It's crucial to understand how VAT applies to avoid potential issues with HMRC and manage cash flow effectively.

Residential Property

Income

• Sale of Residential Properties: The sale of residential properties is generally exempt from VAT. This means that the price of the property will not include VAT, and the buyer does not pay VAT on the purchase price.
• Residential Property Leases and Rentals: Residential property leases and rentals are generally exempt from VAT. Landlords do not charge VAT on rent received from tenants. However, if a landlord provides certain services (e.g., cleaning or maintenance) alongside the rental, VAT may apply to those services, but not to the rent itself.
• First Sale of a New Qualifying Dwelling: The first sale of a new qualifying dwelling (house or flat) is zero-rated (0% VAT). This means the developer does not charge VAT to the buyer on the first sale of a new residential property.

Expenditure

• Construction of New Qualifying Dwellings: The construction of a new qualifying dwelling (house or flat) is zero-rated (0% VAT). This allows the developer to reclaim VAT on construction costs.
• Renovation and Repair: Most renovation and repair work on existing homes is standard-rated at 20%. However, a reduced rate of 5% may apply to specific works, such as:
  • Converting a non-residential building into a dwelling.
  • Converting a single dwelling into multiple flats, or vice versa.
  • Renovating a property that has been continuously vacant for at least two years.
• Refund Scheme for Self-Builders: Individuals building their own home can use a refund scheme to reclaim VAT on eligible building materials. Note that this is available only to non-VAT-registered individuals.

Holiday Lettings

• Income from Holiday Lettings: Income from serviced accommodation, short-term leases, or holiday lettings is generally subject to VAT at the standard rate of 20%, provided the property is part of a business offering accommodation. If the property is rented out privately and not part of a business, VAT would not generally apply.

Commercial Property

Income & Expenditure

• Sale of New Commercial Properties: The sale of new commercial properties may be subject to VAT at the standard rate of 20%. The seller will charge VAT on the transaction price.
• Commercial Property Rentals: Commercial property rentals can be subject to VAT if the landlord has opted to tax the property. This means the landlord can charge VAT on the rent and recover VAT on related expenditure.
  • Option to Tax (OTT): Owners of commercial property can choose to "opt to tax," which means they charge VAT (at the standard rate of 20%) on the sale or rental of the property. The primary reason for exercising this option is to reclaim input VAT on associated costs (e.g., maintenance, refurbishment, or purchase costs) which would otherwise be unrecoverable.
  • The option to tax is generally irrevocable for 20 years and must be notified to HMRC in writing.
  • The option to tax does not apply to the residential parts of a mixed-use property.
• Transfer of a Going Concern (TOGC): If a commercial property with existing tenants is sold as part of a continuing rental business, the transaction may qualify as a Transfer of a Going Concern (TOGC), meaning it falls outside the scope of VAT, provided certain conditions are met. Both the buyer and the seller must be VAT-registered, and the seller must have opted to tax the property, if applicable.
• Stamp Duty Land Tax (SDLT): If VAT is applicable to the purchase price, Stamp Duty Land Tax (SDLT) is generally calculated on the total VAT-inclusive price. This can significantly increase the buyer's costs.

Partial Exemption and Property

Whether you're dealing with residential, commercial, or mixed-use property, it's important to understand when VAT applies, how to reclaim it, and what reliefs might be available.

• Taxable Supplies: These are goods or services where VAT is charged at the standard (20%), reduced (5%), or zero rate (0%). The associated input VAT can generally be recovered in full.
• Exempt Supplies: These are goods or services not subject to VAT. You cannot reclaim the input VAT incurred in making them. A common example in the property context is the letting or leasing of a dwelling house or commercial property (unless an option to tax has been made).
• Partially Exempt Business: A business that makes both taxable and exempt supplies.
• Input VAT: Input VAT is the VAT a business incurs on its expenditure. It is divided into three categories for a partially exempt business:
  • Directly attributable to taxable supplies: Fully recoverable.
  • Directly attributable to exempt supplies: Not recoverable (unless the de minimis limits apply).
  • Residual (overhead) input tax: Relates to both taxable and exempt activities (e.g., utilities, general maintenance). This must be apportioned using a specific method.
• De Minimis Limits: Input tax on exempt supplies may be recoverable if it meets the "de minimis" limits. These are defined as:
  • Less than £625 per month on average, and
  • No more than 50% of total input tax.

The VAT rules for property are highly specific to each transaction. It is essential to determine the correct VAT treatment before entering into any property transaction or starting any work to avoid potential issues with HMRC. Ensuring the correct treatment can also help manage cash flow effectively and take advantage of any available reliefs.

How We Can Help

If you're involved in property transactions and need assistance in understanding VAT or managing VAT liabilities, don't hesitate to get in touch with us. Arnold Hill & Co LLP provides expert VAT advisory services to ensure you're fully compliant and optimising your VAT position. 

Author, Evelina Sobczyk - Outsourced Finance 

Evelina.Sobczyk@ArnoldHill.co.uk