VAT on Residential and Commercial Property

PHS Team

30 May, 2025

VAT on property can be a complex and often misunderstood topic. Whether you're a homeowner, landlord, or business owner, understanding how Value Added Tax (VAT) applies to property is important for financial planning and compliance. This blog post aims to explain the subject, breaking down the essentials of VAT relating to residential and commercial properties.

We explore how VAT affects different types of properties, from your family home to holiday lets and office spaces. You will learn about the standard VAT rate when it applies and important exceptions to be aware of. We also cover key concepts like the Option to Tax for commercial properties and how it can impact your tax liability.

By the end of this blog, you will have a clearer understanding of how VAT works in the property sector, helping you make informed decisions and avoid costly mistakes. We cover everything from basic definitions to specific scenarios, helping you confidently navigate the complexities of VAT on property.

Residential property and VAT

Understanding how VAT applies to residential property is essential for landlords, tenants and property investors. This section will break down the key points regarding VAT on residential rentals, holiday accommodations and off-season rentals, making it simple and easy to understand.

VAT on residential rentals

VAT is not charged on residential rentals. This means that if you are renting out a residential property, you do not need to add VAT to the rent you charge your tenants. Here are the key points to remember:

• Exemption: Residential rental income is exempt from VAT. This applies to long-term rentals where the property is used as a primary residence.
• No VAT recovery: Since the rental income is exempt, landlords cannot recover VAT on expenses related to the rental property, such as maintenance and repairs.
• Exceptions: There are specific situations where VAT might apply, such as if the property is used for short-term holiday lets or if additional services are provided (e.g., cleaning, laundry).

VAT on holiday accommodations

Holiday accommodations are treated differently from standard residential rentals when it comes to VAT. Here are the main points to consider:

• Standard rate: Holiday accommodations are subject to the standard rate of VAT, which is currently 20% in the UK. This means that if you rent out a property as a holiday let, you must charge VAT on the rental income.
• VAT registration: If your total taxable turnover from holiday accommodations exceeds the VAT registration threshold (currently £85,000 per year), you must register for VAT and charge VAT on your holiday lets.
• VAT recovery: Unlike standard residential rentals, you can recover VAT on expenses related to holiday accommodations. This includes costs for maintenance, repairs and any services provided to guests.
• Short-term lets: Properties let for short-term stays (typically less than 28 days) are considered holiday accommodations and are subject to VAT.

Off season rentals

Off-season rentals can be a bit more nuanced when it comes to VAT. Here’s what you need to know:

• Definition: Off-season rentals refer to renting out a property during periods when it is not typically in high demand, such as winter months for a summer holiday home.
• VAT treatment: The VAT treatment of off-season rentals depends on the nature of the rental. If the property is rented out as a holiday accommodation, it remains subject to VAT, even during the off-season.
• Long-term off season rentals: If you rent out the property for a longer period during the off-season (e.g., several months), it may be treated as a standard residential rental, which is exempt from VAT. However, this depends on the terms of the rental agreement and the intended use of the property.
• Mixed use: If a property is used for both holiday lets and long-term residential rentals, you may need to apportion the VAT accordingly. This means charging VAT on the holiday lets and treating the long-term rentals as exempt.

VAT on residential property can be challenging, but understanding the basic principles can help you manage your property investments more effectively. Residential rentals are generally exempt from VAT, but holiday accommodations and certain off-season rentals may be subject to VAT. Always consider the specific circumstances of each rental and consult with a VAT expert if you are unsure about your obligations. By staying informed, you can ensure compliance and make the most of your property investments.

Commercial property and VAT

Understanding VAT on commercial property is essential for landlords, tenants and investors. This section will break down the general VAT rules, the option to tax and exceptions to VAT exemption in a straightforward manner.

General VAT rules for commercial property

1. Standard VAT rate: Commercial property transactions are generally subject to the standard rate of VAT, which is currently 20% in the UK. This applies to the sale, lease, or rental of commercial properties.
2. VAT registration: If your business's taxable turnover exceeds the VAT threshold (currently £85,000 per year), you must register for VAT. Once registered, you must charge VAT on your commercial property transactions and can reclaim VAT on related expenses.
3. VAT invoices: When charging VAT on commercial property transactions, you must issue a VAT invoice to your tenant or buyer. This invoice should include your VAT registration number, the amount of VAT charged and other required details.
4. Input tax recovery: As a VAT registered business, you can reclaim the VAT (input tax) you pay on goods and services related to your commercial property, such as maintenance, repairs and professional fees.

Option to tax

The option to tax, also known as the election to waive exemption, allows property owners to charge VAT on the sale or rental of commercial property. This can be beneficial as it enables the owner to reclaim VAT on related expenses.

How to opt for tax:

To opt for tax on a property, you must notify HMRC in writing. This election is usually irrevocable for 20 years, meaning you cannot change your mind and revert to VAT exemption during this period.

Benefits of opting for tax

• VAT recovery: By opting to tax, you can reclaim VAT on expenses related to the property, such as renovations, legal fees and maintenance.
• Increased flexibility: It can make your property more attractive to VAT registered businesses that can reclaim the VAT you charge.

Considerations before opting to tax:

• Impact on tenants: Not all tenants can reclaim VAT, such as those in the financial or charitable sectors. Charging VAT may make your property less attractive to these tenants.
• Long term commitment: The 20-year commitment means you need to carefully consider the long-term implications of opting to tax.

Exceptions to VAT exemption

1. New commercial buildings: The sale or lease of new commercial buildings (less than three years old) is always subject to VAT at the standard rate. This means you must charge VAT on these transactions, regardless of whether you have opted to tax.
2. Mixed-use properties: Properties that are used for both residential and commercial purposes may have different VAT treatments for each part. The commercial portion may be subject to VAT, while the residential portion is typically exempt.
3. Charitable use: If a commercial property is used by a charity for non-business purposes, it may be exempt from VAT. However, this exemption is specific and requires careful consideration of the property's use.
4. Transfer of a going concern (TOGC): When a commercial property is sold as part of a business that is continuing to operate, it may qualify as a TOGC. In such cases, the transaction can be treated as outside the scope of VAT, meaning no VAT is charged. Specific conditions must be met for this exemption to apply.

VAT on commercial property can be complex, but understanding the general rules, the option to tax and the exceptions to VAT exemption can help you make informed decisions. Whether you're a landlord, tenant, or investor, being aware of these VAT implications can save you from unexpected costs and ensure compliance with HMRC regulations. Always consider seeking professional advice to tailor VAT strategies to your specific circumstances.

VAT on property transactions

When it comes to property transactions, understanding VAT implications is crucial for both buyers and sellers. Let's break down how VAT applies to buying, selling and leasing commercial property in simple terms.

Buying commercial property

When you're purchasing a commercial property, VAT considerations can significantly impact the overall cost. Here are the key points to remember:

1. Standard VAT rate: Most commercial property sales are subject to VAT at the standard rate (currently 20% in the UK), which is added to the purchase price.
2. VAT free purchases: Some commercial properties are sold VAT-free. This typically happens when the property is older than 3 years and hasn't been opted to tax.
3. Transfer of going concern (TOGC): If you're buying a property with an existing tenant, it might qualify as a TOGC. In this case, no VAT is charged on the sale, potentially saving you a significant amount.
4. VAT recovery: If you're VAT registered and will use the property for VAT taxable purposes, you may be able to reclaim the VAT paid on the purchase.
5. Mixed use properties: For properties used for both residential and commercial purposes, VAT may apply only to the commercial portion.

Selling commercial property

When selling a commercial property, VAT rules can affect your sale price and potential profit. Here's what you need to know:

1. VAT registration: If you're VAT registered, you'll generally need to charge VAT on the sale of a commercial property.
2. Option to tax: If you've opted to tax the property, you must charge VAT on the sale, regardless of the property's age.
3. VAT exempt sales: Some commercial property sales are VAT exempt, such as those that haven't been opted to tax and are more than 3 years old.
4. Disclosure: It's important to clearly state whether VAT will be charged on the sale price to avoid misunderstandings with potential buyers.
5. Capital goods scheme: Be aware of potential VAT adjustments under this scheme if you've claimed VAT on property improvements in the past 10 years.

Leasing Commercial Property

VAT rules for leasing commercial property can be complex, but understanding the basics can help both landlords and tenants. Here are the main points:

1. VAT exempt leases: Generally, leasing commercial property is VAT-exempt unless the landlord has opted to tax the property.
2. Option to tax: If a landlord opts to tax, they must charge VAT on rent and service charges but can reclaim VAT on property-related expenses.
3. Tenant considerations: VAT registered tenants can usually reclaim VAT charged on rent, but non VAT registered tenants can't, making the lease more expensive for them.
4. Break clauses: Be aware that exercising a break clause in a lease can sometimes trigger a VAT charge.
5. Sub letting: If you're sub letting part of a property, the VAT treatment should typically follow that of the main lease.

Understanding these VAT rules is important for making informed decisions in commercial property transactions. For buyers, it's crucial to factor in potential VAT costs when budgeting for a purchase. Sellers need to be clear about their VAT status and whether they'll be charging VAT on the sale. For those involved in leasing, understanding the implications of opting to tax and how it affects both landlords and tenants is vital.

Remember, VAT rules can be complex and subject to change. While this overview provides a general understanding, it's always advisable to consult with a qualified tax professional or accountant for advice tailored to your specific situation. They can help you navigate the intricacies of VAT on property transactions and ensure you're compliant with current regulations while maximising any available tax benefits.

By being aware of these VAT considerations, you can approach commercial property transactions with greater confidence, potentially saving money and avoiding unexpected tax liabilities.

Special cases

When it comes to VAT on property, certain situations require special attention. Let's explore three important cases: new buildings, renovations and conversions and Transfer of a Going Concern (TOGC).

New buildings

Are new buildings subject to VAT? Generally, the construction of new residential properties is zero-rated for VAT. This means that while no VAT is charged on the sale, the builder can still reclaim VAT on construction costs. However, for new commercial buildings, the standard VAT rate (currently 20%) usually applies.

Renovations and conversions

How does VAT work for property renovations? It depends on the type of work:

1. For residential properties, most renovation work is subject to the standard VAT rate.
2. However, renovations of buildings empty for two or more years may qualify for a reduced 5% VAT rate.
3. Converting a non-residential building into a home can also benefit from the 5% rate.

Always check the specific rules for your project, as they can be complex.

Transfer of a going concern (TOGC)

What is a TOGC, and how does it affect VAT? A TOGC occurs when a business is sold as a functioning entity. In property terms, this often applies to the sale of a tenanted building. The key benefit? A qualifying TOGC is outside the scope of VAT, potentially saving the buyer a significant amount.

For a property sale to qualify as a TOGC

• The buyer must intend to use the property for the same kind of business
• If the property is opted to tax, the buyer must also opt to tax
• The seller must transfer all assets necessary for continuing the business

Understanding these special cases can help you navigate complex property transactions more effectively and potentially save on VAT costs.

Common mistakes to avoid

When dealing with VAT on property, there are several common mistakes that property owners and investors should be aware of. By understanding these potential mistakes, you can save yourself from costly errors and unnecessary stress.

1. Misunderstanding the option to tax: Many property owners fail to realise that opting to tax a commercial property is a long-term decision. Be sure you understand the implications before making this choice.
2. Overlooking VAT on property purchases: Some buyers forget to factor in VAT when purchasing commercial property. This can lead to unexpected costs and cash flow issues.
3. Incorrect VAT treatment of mixed-use properties: Properties used for both residential and commercial purposes require careful VAT consideration. 
4. Failing to keep proper records: HMRC requires detailed records for VAT purposes. Poor record-keeping can lead to difficulties during audits or when reclaiming VAT.
5. Missing VAT recovery opportunities: Some property owners miss out on legitimate VAT recovery opportunities, particularly on expenses related to opted-out properties.
6. Ignoring VAT on property management fees: If you use a property management company, their fees may include VAT, which you might be able to reclaim if the property is opted out.
7. Mishandling VAT on deposits: Deposits for commercial properties can have VAT implications. Misunderstanding when VAT is due on deposits can lead to cash flow issues.

By being aware of these common mistakes, you can take steps to avoid them and ensure you're handling VAT on your property correctly. When in doubt, it's always best to consult with a VAT specialist or accountant to navigate these complex issues.

How PHS Associates Helps You

Do you find VAT on property complex and want to avoid costly mistakes? Consulting with the best VAT or property accountants can make all the difference. At PHS Associates, we understand the unique challenges faced by property owners and offer expert services to help you navigate VAT regulations smoothly.

Our team of friendly experts is ready to discuss your specific requirements and provide customised solutions. Contact us by phone at 0208 8611685 or by email at info@phs-uk.co.uk  if you need accountants. Let us help you manage your property VAT with confidence and ease.