VAT on rent - how does it work?

In an era where tax regulations are continually evolving, understanding the implications of VAT on rental transactions has become increasingly important for both landlords and tenants alike. Whether you're a property owner, tenant, or simply curious about the relationship between taxation and tenancy, this blog aims to provide valuable insights into VAT on rent. 

If you require specific advice on any of the issues raised in this blog, we welcome you to contact our VAT Consultancy & Planning team.

What is the VAT on residential lets? 

VAT is not charged on rent if the building is a residential property. This includes:

• houses
• flats
• bungalows 

The rental of residential property is exempt from VAT.

However, VAT is charged at the standard rate (20%) on holiday accommodation rentals. Examples of holiday accommodation include:

• houses (including cottages and bungalows)
• flats
• chalets
• villas
• beach huts
• tents
• caravans
• houseboats

Accommodation advertised as holiday accommodation and/or held out as suitable for holiday or leisure use is always treated as holiday accommodation and is standard-rated for VAT purposes.

Holiday vs off-season

However, VAT is not charged on holiday accommodation rentals during the off-season, provided it is leased as residential accommodation for more than 28 days, and the accommodation is in a location where the holiday trade is seasonal. The holiday season normally lasts from Easter until the end of September. 

Some areas, such as London and Edinburgh, are not regarded as having a seasonal holiday trade as they have large numbers of visitors throughout the year. The rental of holiday accommodation in areas with all-year-round visitors is subject to VAT.

A tenancy agreement or similar evidence is required to show that the accommodation was occupied for residential purposes only and, therefore, qualifies for VAT exemption if rented for over 28 days out of season.

VAT on commercial lets

The VAT treatment of commercial property rental depends on whether the property is subject to an option to tax. Without an option to tax, the rent is exempt from VAT. If there is an option to tax, the rent is subject to VAT at the standard rate.

Even without an option to tax, some property transactions are treated as standard-rated for VAT purposes. For example:

• Space for storage purposes
• Garages or designated parking spaces
• Hairdresser chair rental
• Room hire as part of a wedding package
• Boxes, seats or other accommodation at a sports ground or entertainment venue such as a theatre
• Facilities that can be used for sport or partaking in physical recreation

However, you cannot assume that the above are standard-rated in all circumstances; some exceptions enable the rental charges to be exempt. You should seek advice to establish whether VAT is chargeable.

If you have a query relating to VAT on rental properties, or any other area of VAT, we invite you to send us a message or contact our VAT team directly.