Residential Buy-to-let and VAT

buy-to-letResidential buy-to-let are VAT exempt. Which means VAT can’t be charged on rents. It also means that VAT can’t be reclaimed on expenses, repair costs, agents fee’s etc. The assumption therefore is that residential landlords can ignore VAT. But this isn’t always the case.

If a landlord owns another business which is VAT registered they must take rental income into account when completing VAT returns.

Example

David owns a retail business and sells on Ebay. He also own a residential buy-to-let property which he rents out. David is VAT registered. In quarter 2 he decorated the residential property for £5,000 + £1,000 VAT. No other VAT was paid on the residential buy-to-let in quarter 2. In the same quarter his purchases for the retail business were £35,000 + £7,000 VAT. David must show both VAT payments in his VAT return.

Reclaiming VAT on residential buy-to-let

The general rule prevents David from recovering the £1,000 VAT on the redecorating costs. However as he has a VAT registered business he is regarded as making a partially exempt supply on rents. VAT on expenses relating to rents can now be reclaimed. Provided that in the return period VAT on rent expenses doesn’t exceed.

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

Therefore David can reclaim the entire £1,000 VAT paid on decorating costs. This is because on average it is only £333 per month and less than 50% of the VAT on total purchases. ((£7,000 + £1,000) x 50% = £4,000).

Even if the above limits are breached for a single VAT period there is a second point of VAT recovery. You must review the calculation for tax as a whole. This annual review of calculation gives you a chance to apply the above rules again. Therefore again giving the possibility of VAT recovery.

Finance Equation Ltd are property tax specialists and preferred suppliers for the Essex property network. Our aim is to help our clients keep more of their money. We use every legal tax route to do this. Contact us for a buy-to-let

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2 comments on “Residential Buy-to-let and VAT
  1. Andrew Moore says:

    Hi I built 4 new flats last year and now rent out I am not vat registered or ltd company ,been told I can not reclaim vat ,is that correct ?

  2. admin says:

    Hi Andrew

    It would seem that now you are not in a position to reclaim the VAT on the 4 flats. You had an opportunity to do so when you where building the flats. However even if you had reclaimed the VAT when you where building them, as you are now renting, there would have been a clawback and you would have had to repay all or some of the VAT you had reclaimed.

    I am sorry not to be able to give you better news.

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