VAT Intricacies regarding Land and Property
It can be a costly error ignoring the VAT implications surrounding land/property transactions, whether you are the vendor/purchaser, the landlord/tenant or the transferor/transferee.
- Normally there is no VAT charged on the sale or rental of a residential property or a communal residential home or if the building is being used for charitable purposes. The landlord or vendor might incur VAT on costs relating to the sale or rental of the property g. solicitors fees or ongoing maintenance costs. They may only be able to recover the VAT on those costs if they have built the dwelling themselves.
- Unless the sale is part of a transfer of a going concern, if you sell a new commercial building within 3 years of it being built, then you would charge VAT at 20% on the sale price. If the sale takes place after that date or if it is rented out then the starting position is that the landlord/vendor would not be able to charge VAT on the sale or the rent and would not be able to recover the VAT on any expenses incurred.
- However, in this latter case, they could make an election known as ‘opt to tax’. This would mean they would charge VAT on the sale or the rent going forward enabling them to recover the VAT imposed on their expenses.
- If the purchaser/tenant is VAT registered and is going to be using the property for their own trading purposes then they may be able to claim back, in part or in whole, the VAT charged on the acquisition or the rent.
- If, however, the person acquiring the commercial property is intending to rent it out themselves, they need to consider whether to make the election to ‘opt to tax’ otherwise they will not be able to claim the VAT back on the costs of purchase. If made, they then need to charge VAT on the rent to their tenant.
- It is important to note that land taxes are charged on the VAT inclusive purchase price figure.
- Where a vendor has made an ‘opt to tax’ election, this may be ignored in certain circumstances, such as where a housing association is involved or the buyer is intending to convert the premises into dwellings or communal residential use or they are intending to build a residential property on the land for their own non-commercial purpose.
- You can revoke an ‘opt to tax’ election within the first 6 months of making it or after 20 years.
- If you are a VAT registered business which acquired trading premises costing £250,000 or more and you are intending to sell it on within 10 years of purchase, care needs to be taken that HMRC do not claw back some of the VAT recovered on the original purchase.
These are just some subtle nuances surrounding VAT and land/property. Look at the VAT implications in advance of any land/property transactions. We have VAT specialists to provide the appropriate advice if you need help.