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17/12/25 3:30 pm
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For the average buy to let landlord, VAT is usually a bit of an afterthought. Most residential landlords know that they cannot recover any of the VAT they incur on their expenditure – management fees, repairs, accountancy costs etc – and so for good reason it is often overlooked and written off as simply another cost to take on the chin.
It is worth mentioning at this point that the rules are very different for commercial landlords who can, in the right circumstances and with good planning, often recover a significant proportion of the VAT they incur. However, that is a whole different article – for today I simply want to answer the question, is it ever possible for a residential landlord to save VAT?
To aid with understanding some of the issues, it is worth providing a short insight into why landlords are normally unable to recover VAT they incur. Businesses that make “taxable supplies” for VAT purposes can recover VAT but residential rental income is classed as VAT exempt income and thus no VAT is recoverable.
So, are there any exceptions to these rules? The short answer is yes – the slighter longer version is that there are two sets of circumstances where VAT savings are possible:
• When residential landlords are deemed to be making taxable supplies; and
• When the category of expenditure can be charged to the landlord at a lower VAT rate.
Taxable supplies
There are only very exceptional circumstances where landlords can create taxable supplies allowing for VAT recovery. The most common example of this occurs in the build to rent sector – where landlords are building residential property which they then rent out. Unfortunately, if you simply build property and then rent it out, the normal rules apply. Careful structuring however can allow for full VAT recovery on build, planning, and associated costs to be made.
Lower rate VAT
It is increasingly common for landlords to seek better returns by making changes to existing residential property – maybe by converting a house into several flats or perhaps an HMO. If that is something you are thinking of doing, VAT planning becomes important. In the right circumstances building costs can be reduced to a 5% VAT rate. Sometimes if you co-operate closely with contractors and plan carefully it can even be possible to get all associated costs reduced to that rate.
Depending on the nature of the property being converted, the VAT situation can be further improved with careful planning. If for example you are converting commercial property to flats then not only can the rate be reduced, but it is also often possible for a taxable supply to be generated allowing for full recovery of even that lower amount of VAT. Again, that requires careful and appropriate structuring without which VAT that would otherwise be recoverable could be lost.
The message to landlords – if you are undertaking significant works, you should always get the right VAT advice. The savings can be significant and can make a big different to the return being achieved on a project.
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