A complete guide to VAT on rent for UK landlords
Many landlords in the UK are understandably unsure whether or not they should be paying VAT on their rental income. Rental income can come from various sources, including from the rent charged on residential properties, holiday lettings and commercial units.
Generally speaking, rent on residential properties is VAT exempt, meaning that landlords who buy to rent are not typically required to pay VAT, nor able to recoup VAT from HMRC as a portion of their expenses. Nevertheless, the rules surrounding VAT on rent are nuanced. Different scenarios within each rental category – commercial, residential, holiday lets – may make you VAT exempt or liable. Given that there are over 5 million rental properties in England and Wales alone, according to the latest housing census, it is crucial that landlords understand where they stand with regards to VAT on rent.
How VAT works
Value added tax (VAT) is a tax added to the price of various supplies and goods in the UK. Most people know that VAT makes everyday items a bit more expensive, but business owners and landlords require a deeper understanding if they are to make the most out of their business.
When a business – be that a sole trader, partnership, limited company or otherwise – exceeds the VAT registration income threshold, it must register for VAT with HM Revenue & Customs (HMRC). The VAT registration income threshold is currently £85,000pa. Businesses trading under the threshold may nevertheless choose to voluntarily register for VAT. Once registered, you acquire several additional responsibilities, including collecting VAT, filing VAT returns, and paying your VAT bill.
Depending on your business activity, different VAT rates may apply:
- Standard rate of VAT (currently 20%)
- Reduced rate (currently 5%)
- Zero-rated (0%)
Some goods and services may also be VAT exempt. The difference between VAT exempt and zero-rated VAT is that VAT can still be reclaimed as expenses from HMRC for zero-rated goods and services, whilst it cannot for those exempt from VAT.
What types of rental properties are VAT exempt?
Selling, renting, or leasing residential property in the UK is generally exempt from VAT, though, as we mentioned earlier, there are many potential exceptions. Being exempt has both its pros and cons.
When a landlord’s business activity is exempt from VAT, the prices they charge tenants will not include VAT and so may be more competitive as a result. This can have a positive impact in reaching a wider market of tenants, especially in a marketplace where tenants face both a cost of living and a rental housing crisis.
Being exempt from VAT on rental income does, however, mean that a landlord cannot recover the VAT from any costs incurred during the procurement and maintenance of the residence.
It is the recuperation of costs for which many landlords wish to charge VAT. To better understand the rules around VAT on rental income, let’s begin by looking specifically at residential rental property.
Do you charge VAT on residential property rent?
Generally, residential property rent is VAT exempt. A residential rental is usually a simple tenancy agreement between landlord and tenant, with many managed by a letting agency. If the landlord does not own any other business, they cannot typically register for VAT. As such, no VAT can be added to the payment of rent nor recouped from costs through HMRC.
Does this then mean that residential property landlords are never able to recover the VAT spent on their properties? Well, not necessarily. In some cases, buy-to-let landlords might be able to recover VAT costs incurred through decorating the property, for example. Similarly, conversions of non-residential buildings to residential properties may be VAT-deductible.
To charge VAT on rent, a landlord must own another VAT-registered business. This way, both businesses would share the same VAT registration. In this case, the VAT added to certain costs like agency fees and refurbishment might be recoverable, but only under HMRC’s VAT de minimis rule.
Recovering VAT on buy-to-let property income is complex, and as such landlords must be careful. When in doubt, always begin by asking yourself: do I need an accountant? In most cases, seeking the advice of a professional can save you time and stress, if not also lead to you recovering a good amount of VAT.
Do you charge VAT on holiday lettings?
VAT on holiday lettings is equally complicated. Hotel rental income, for example, is usually subject to VAT. Holiday lettings, though – for example Airbnb’s – fall into a grey area between residential property and hotels. There’s also the question of who owns the property. The rules can change depending on if a business, partnership or sole trader is the owner.
Fundamentally, holiday lets are subject to the same rule as hotels: they should charge VAT on their rental prices. Yet not all do. This is down to the VAT threshold. Many holiday let owners don’t turn over the required VAT threshold amount of £85,000 per year, meaning they are not legally required to add VAT to their rates. They may however opt to voluntarily register for VAT if their turnover is below the threshold.
Holiday lettings landlords turning over more than the VAT threshold must register for, and charge, VAT. This can increase rates, but also makes VAT spent on the property recoverable. From April 2022, holiday lets are subject to standard rate VAT of 20%.
Many costs involved in holiday lettings rent should include VAT, such as:
- Cleaning
- Laundry
- Catering
- Some transportation costs
As always, if in doubt about what you should charge and what you can recoup, speak to a professional VAT services accountant.
Do you charge VAT on commercial property rent?
Typically, rental income from commercial property is also VAT exempt. However, VAT on rental income from commercial properties can be the trickiest of all rental categories to navigate. There are many types of commercial premises, each owned by different entities and leased by companies in various industries, with several rules in place for each.
Different situations affect whether or not you should charge VAT on commercial rent. Landlords wondering whether to charge VAT on commercial buildings should always seek professional advice.
Opting to tax
In many commercial rental situations, it may make sense for the landlord to charge VAT – especially when there are significant costs to recover. In such cases, property owners can “opt to tax” their commercial properties.
Opting to tax is a big decision. To do so, an owner must submit Notice 742a to HMRC before charging VAT on their rent. Once signed, the owner may then charge VAT on any future sale or commercial lease, as well as the majority of costs involved in their commercial property’s rental agreement.
Obviously, opting to tax your property will increase costs, but it also allows owners to recover VAT paid on refurbishments and other outgoings. The opt to tax law comes with exemptions and considerations too numerous to mention, so professional advice is critical.
Transfer of going concern
Another commercial property rental VAT consideration is called ‘the transfer of going concern’ (TOGC). If an opt to tax property has been sold with an existing tenant in place, it can be unclear whether VAT should be applied. In most cases, the new owner could be required to charge VAT.
TOGC rules are unsurprisingly quite complicated. If the new owner of a commercial property intends to retain the existing tenants, then the sale of the property might count as a transfer of going concern. This would generally make it VAT exempt and, potentially, more attractive to investors.
Like the opt to tax laws, though, TOGC laws are plentiful and intricate. Great care should be taken when exploring TOGC real estate opportunities, with expert advice taken at every step.
VAT on rent of a ‘New Commercial Property’
A further commercial rental income wrinkle comes with the sale of new commercial property. For the avoidance of doubt, a ‘new’ commercial property is classified as being three years old or younger.
In the majority of cases, sales of a new building are subject to VAT. An investor in this situation is then likely to benefit from opting to tax, allowing them to recover the VAT paid on the purchase. Of course, all future charges would then also be subject to VAT, with the exception of TOGCs.
Conclusion: Navigating VAT on rental income with UWM Accountants
VAT on rental income is a complex subject. Residential landlords are typically unlikely to ever have to deal with VAT, whether they’d like to charge it or not. Similarly, holiday lettings landlords should only have to charge VAT once they’ve reached the compulsory VAT threshold. Commercial landlords typically won’t pay or charge VAT either, unless they qualify for one or more of the various exceptions.
The bottom line is that VAT with property rental is tricky, and is only made more so by the introduction of Maxing Tax Digital (MTD) for landlords. In the right situation, recovering VAT spent can provide large cash injections for landlords. Yet, in all cases, owners should avoid non-compliance and maximise the potential of their rental property income by seeking the guidance of a qualified professional accountant.
