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VAT on Residential Property | Insights for Owners & Investors

Published by Prasun Shrestha
Published Date: September 7, 2023

Navigating the complex world of Value Added Tax (VAT) on residential property in the UK can be a daunting task. This comprehensive guide aims to shed light on the various implications of VAT at different stages of property ownership, from purchase to conversion, selling, and development.

So, let's dive right in and unravel the intricacies of VAT on residential property in the UK.

VAT on Residential Property

Normally, residential property purchases in the UK do not incur VAT and is exempted, simplifying the financial aspect of the transaction.However, when a supply of the freehold or a lease of more than 21 years of the residential dwelling is made, this supply is Zero-rated.

There is a fine line between not applying the VAT and Zero rating a supply.

The Zero rating of supply allows recovery of input tax paid on the supplies. This is basically applicable for the property builder.So, if you sell your residential property or buy a residential property, there is not any VAT implication associated in this transaction.

But we will look at different situations relating to Residential property in the UK.

Zero Rated supply of Residential property

As discussed above, this is mainly applicable to the property developers in the UK. 

This is triggered only when the supply is of first grant of major interest of the freehold or first granted lease of more than 21 years of the dwelling.

Zero Rated supply of Residential property

Converting a non-residential building into a building designed for dwelling or intended to use for a relevant residential purpose is also ‘the first grant of a major interest’ and hence zero rated.

There are multiple factors that need to be considered while dealing with the property conversion transaction and we have a detailed article regarding the VAT on Property Conversion

Exempt Supply of Residential Property

Exempt Supply of Residential Property

If you are not a property builder, then any supply you make for the Residential property is exempted from VAT.

You will not be able to claim back any input VAT paid that is associated with the Residential property as this is not a taxable sale for VAT.

Even though, no VAT is charged when the transaction is Zero rated, this is called taxable sale for VAT and hence input VAT associated with such Zero rating supply can be claimed back. This is the major difference between Zero Rating a supply and Exempted supply.

Reduced Rating on Residential Conversion

VAT is charged at the reduced rate of 5% on qualifying services supplied in the course of certain residential conversion.

Residential Conversion is

  • Conversions that result in a change in the number of household dwellings. The law refers to these as "changed number of dwelling conversions." Examples include converting a house into a flat, a flat into a house, or commercial property into a house or flats.
  • Conversion of structures into multiple occupancy dwellings. These are referred to in the law as "house in multiple occupation conversions." Examples include the creation of bed-sits in residential or commercial Property.

Qualifying Services include services for the carrying out of works to the fabric of the building, like works on Walls, roof, internal surfaces, floors, stairs, windows, doors, plumbing and wiring.

Reduced Rating on Residential Conversion

So long as they are to the fabric, works do not need to be structural – the application of a coat of paint will qualify. But works to the fabric do not include the incorporation of any goods into the building, or their installation as fittings, unless they are ‘building materials’.

Works that are not to the fabric can qualify for reduced-rating if they are within the ‘immediate site’ and in connection with the means of providing any of the following to the building or premises:

  • water
  • power
  • heat
  • access
  • drainage
  • security 
  • waste disposal.

Note: The reduced rate does not cover related professional services, such as those of architects and surveyors.

Materials are also subject to reduced rate of 5% if

  • they are supplied by a contractor supplying reduced-rated services;
  • in the course of doing so, he incorporates them into the building or its site; and
  • they qualify as ‘building materials’.

‘Building materials’ are defined as goods of a kind ‘ordinarily incorporated’ by builders in a building of the kind in question – in this case, in dwellings.

Most furniture, most electrical or gas appliances, carpets and carpeting material – which are therefore standard-rated.

VAT on Residential Property Refurbishment

For anyone who is not a property developer, any VAT paid that is associated with the residential property cannot be claimed back.

To give the financial aid for the lost VAT paid, a reduced VAT rate is applicable when the residential property is Renovated and altered.

The supply of qualifying services in renovation or alteration of a single household dwelling are subject to VAT at the reduced rate of 5%

However, the following conditions must be satisfied for the reduced VAT:

  • The dwelling must not have been lived in for two years or more.
  • Reduced rate is applicable to qualifying services on the building used for a relevant residential purpose or a multiple occupancy dwelling.
  • The building material can also be charged at the 5% rate when supplied with a qualifying service.

Summing Up

In summary, navigating VAT on UK residential property is intricate yet vital. This guide demystifies the complexities, distinguishing between Zero-rated and Exempt supplies, emphasising input tax recovery for developers.

The reduced VAT rate for refurbishment incentivises property enhancement. By grasping these nuances, stakeholders can make informed decisions, optimising their investments and contributions to the housing market.

Prasun Shrestha
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