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Residential buy-to-lets and VAT

It’s no secret that the buy-to-let market has recently been targeted with increased and additional taxes. However, some landlords might be overlooking a tax-saving opportunity. What’s involved?

Property taxes

If you’re a landlord of residential property you’ll be aware of the special income tax, capital gains tax and stamp duty land tax rules which apply to you. The one major tax not yet affected is VAT. The reason for this is that letting residential accommodation is VAT exempt, which means you can’t charge it on rents. The other side of the coin is that you can’t reclaim VAT on your property, expenses, repair costs, agent’s fees, etc.

You can’t ignore VAT

It’s often assumed that the exempt status of residential landlords suggests that they can ignore VAT, but actually that isn’t always the case. If you own another business which is registered you must take your rental income into account when completing your VAT returns.

Example. Sam owns a retail business plus residential accommodation (a flat), which he rents out. Sam is VAT registered. In the quarter ended 30 June 2016 he redecorated the flat at a cost of £5,000 plus £1,000 VAT. He incurs no other expenses on the flat on which he paid VAT. In the same period his purchases for the business are £35,000 plus £7,000 VAT. Sam must show in Box 4 of his return the total of the VAT paid in the period including that on the flat redecoration.

Getting the VAT back

The general rules prevent Sam from recovering the £1,000 VAT on the redecoration costs, but the good news for him is that because he also has a business which makes VATable supplies, he gets a another bite at the cherry.

Partly exempt

If you make both VATable and exempt supplies HMRC refers to you as partly exempt. A partly exempt person (that means an individual, partnership or company) can reclaim VAT paid on expenses relating to exempt supplies if in the return period it doesn’t exceed:

  • £625 per month on average; and
  • 50% of all VAT on purchases the business makes in the VAT return period.

Sam can reclaim the £1,000 VAT paid on the redecoration costs, because as on average it’s only £333 per month and less than 50% of the VAT on total purchases ((£7,000 + £1,000) x 50% = £4,000).

Tip. Even if the limits mean that you can’t reclaim VAT on an exempt cost for a VAT return period, you must review the calculation for the tax year as a whole. This is known as the annual adjustment and gives you a second chance to recover VAT using the £625 and 50% rule.

What if I’m not VAT registered?

If you don’t have another business which is or can be registered for VAT you could create one. Here’s a few ideas you can use:

  • if you run a business through a company provide freelance consultancy services to it
  • buy and let parking/garage spaces to persons other than your tenants
  • if your property is in a suitable area consider letting it, at least for part of the year, as holiday accommodation.
    Business Help UK Group qualified accountants specialising in tax services for landlords. We'll take the hassle out of dealing with the accounts and tax returns in respect of your investment properties. Our fixed fee billing approach means that you know the cost of our services from the outset.
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