VAT & Landlords – the Option to Tax Property

4 April 2022 Brian Gooch View all News

The letting of property is normally an exempt activity for VAT.  The implication for a property investor making VAT exempt rentals is that no related input VAT can be recovered and, if the landlord has no other business activities, can’t even register for VAT.

So a property investor will have to bear the additional VAT cost of any refurbishment or repair work carried out on a let property together with any accountancy and legal costs, unless any of these costs can be passed on to the tenant.

The Option to Tax

However, a property investor can “opt to tax” a commercial building. This means that VAT must be charged on any rents received and any leases or sale of the property in future, although in special circumstances VAT might not be charged on a lease or sale.

Once opted, a property investor can recover VAT on any expenses that relate to the opted property.

An option can be in respect of a particular property, all an investor’s properties, all properties with certain exceptions, or all property in a geographical location.  The option applies to the land on which a building sits and, if demolished, any subsequent property built on the site unless the owner specifically excludes the new building.

A two stage process

Making an option to tax is a two stage process:

  1. The property owner must take the decision to opt to tax the property.

  2. Then within 30 days they must notify HM Revenue & Customs of the decision.

HMRC recommends that the notification is made on their form VAT1614A, but a notification can be made in any format as long as the required information is provided.

There are certain situations where an option to tax has no effect or can be negated by the buyer:

  • Where a building or part of a building is designed as a dwelling;
  • Where a building or part of a building is used by a charity for its charitable activities;
  • Where land is sold to an individual who intends to build a dwelling as a DIY builder;
  • Where land is sold to a housing association to build dwellings; and
  • Where a building is sold to a developer who intends to convert it to a dwelling.

Perhaps the most important and common of these is where the property is to be used as a dwelling. All residential letting income is exempt and no associated VAT can be recovered, although in some circumstances if work is undertaken to convert a non-residential property to residential, or renovate a property that has been empty for a number of years, the builder may be able to  charge VAT at the reduced rate of 5%.

With the exception of a DIY builder, the person acquiring the land for development in the above circumstances must give a certificate to the vendor notifying them that they will be dis-applying the option to tax and stating the reason why.  The vendor can’t refuse the certificate if it is given before contracts are exchanged and they must then treat the building as a VAT exempt property.

This can cause problems for the property investor if significant sums have been spent on the property and a large amount of input VAT recovered, as some of this VAT may be repayable to HMRC.

As mentioned above, in certain circumstances VAT might not need to be charged on the sale of an opted property, where the property is rented to a tenant and the benefit of the lease is being transferred to the new owner.

VAT on property is complex and advice should be sought before every transaction……..

Need more information on Option to Tax?

VAT remains one of the least understood of all taxes, which is why we set up a specialist VAT advisory department, to help guide businesses through the complex maze of VAT legislation.  

Our team help with all areas of VAT from relatively basic issues such as initial registration, the completion and submission of VAT returns and advice on how to correct errors and mistakes, through to more complex issues such as assessments, control visits, cross border transactions, Option to Tax and DIY house builds. 

Whatever your VAT query; why not get in touch, and discuss any queries you may have with a member of our team.

You can also learn more about Land and Property VAT on our dedicated service page.

Land & Property VAT

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