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Understanding VAT on London properties

Anyone buying a property in London is usually very concerned about Stamp Duty Land Tax (SDLT), as this is paid on completion (i.e. at the time of the property transfer). However, when it comes to VAT, few people pay attention to this since it is not applied by HMRC on the transfer of properties.

Introduced in 1973, Value Added Tax (VAT) is the third-largest revenue source for the UK Government after income tax and national insurance. Its higher than Capital Gains Tax, and even Inheritance Tax. It is collected in three rate bands: Full or Standard Rate VAT is charged at 20%, Reduced Rate VAT is charged at 5%, and Zero Rate VAT is not charged at all! When it comes to residential properties, although there is no VAT charged on the purchase, other major repair works and property services, such as hiring an estate agent or carrying out a survey, VAT is charged at the Standard Rate.

For major works or renovations, especially those involving the transformation of older properties which are vacant or converting large family homes into smaller apartments and vice-versa, the cost of labour, materials, and expertise can be very high. Similarly, if a brand new house is to be built after demolishing an old structure, the costs for demolition and construction in London can be well over £1m. With VAT at the Full or Standard Rate of 20%, the VAT could amount to over £200,000.

To reduce this heavy tax burden, HMRC allows people to pay VAT at the reduced rate of 5% or even 0% if certain criteria are met.

How to save VAT on a residential property in London?

It’s not often we can bring you news of tax cuts for UK property owners and landlords. However, there are important Value Added Tax (VAT) reductions available to some UK property owners who are either refurbishing vacant residential properties or building brand-new properties that could help them save thousands of pounds by reducing their VAT bills. While you will find all the necessary VAT reductions for developers and landlords on the UK Gov website, we have put together a detailed list explaining how to reduce your VAT liability.

Firstly, VAT is usually charged on refurbishment work at the standard rate of 20%, but contractors can charge a reduced VAT rate of 5% to eligible customers who meet the government’s criteria. Secondly, when it comes to the construction of a new-build property, many aspects of the work are not subject to VAT at all. So, property owners can make substantial savings, amounting to thousands of pounds.

Here are a few ways to reduce the VAT payable on property works:

1) 5% VAT on renovating an empty house or flat

Here’s how property owners can benefit from 5% VAT on the costs for renovating an empty property, whether that’s a house or flat:

Qualification criteria:

To qualify for 5% VAT, the property must have been vacant for at least two years before works commence. This vacancy must be continuous up to the start of renovation works on site.

Evidence required:

Property owners must provide evidence to prove the property’s vacancy. Circumstantial evidence is rarely sufficient. In our example, the client obtained utility bills showing zero usage and local authority bills as proof that the property had been vacant for 2 years.

Example in Kensington, London:

A client purchased a flat in a period building in Kensington, London, which had been vacant for just over two years before the project commenced. The project qualified for 5% VAT on the majority of the renovation costs due to the continuous vacancy.

What is included and what is not:

The 5% VAT rate is applied to all fixed items within the renovation project. Non-fixed items, such as wardrobes, are subject to the full or standard 20% VAT rate. Consultant fees are also charged at the full 20% VAT rate.

Significant Savings:

In the Kensington project, the renovation contract was over £750,000 plus VAT. As the vast majority of the works were subject to the 5% VAT rate, this resulted in savings of just over £110,000.

For larger projects or if you are unsure due to the savings involved, it’s always best to, consult a VAT specialist. They will help identify which items are subject to the full 20% VAT rate and which will be able to benefit from the reduced 5% rate, ensuring maximum savings.

2) 5% VAT on residential property conversions in London

A client purchased a building in Camden, London, which included a café over the ground and lower ground floors and a single-family dwelling on the first, second, and third floors. With planning permission secured, the property was extended to the rear on the first and third floors and the single-family dwelling was converted into three flats, one per floor.

The reduced 5% VAT rate is applicable to residential properties undergoing conversions, allowing for both increases and decreases in the number of units. Examples include converting a building into flats (as in this example project), flats into a house, an HMO into a single house, or an office into residential units (for instance, under Permitted Development rights). Importantly, the 5% rate only applies to works deemed necessary for the conversion.

Given the complexities of VAT rules, we recommend consulting a VAT specialist before starting the project. During the ‘eligibility phase,’ the specialist assesses the proposal and supporting evidence to determine the appropriate VAT rate. Their expertise continues through the 'apportionment phase,' where they analyse certified costs and advise the contractor on the correct VAT rates to apply to invoices.

In this Camden project, where the costs totalled over £500,000 plus VAT, the majority of the works qualified for the 5% VAT rate, which saved the client over £70,000 in VAT. By leveraging these VAT reductions, investors and property owners can significantly reduce their renovation costs and increase their profits.

Other ways to save money with a reduced VAT rate of 5% include installing energy-saving products and certain work for the elderly (over 60 years old) and people with disabilities.

Explained: 5% VAT on empty residential properties in London

Owners of London properties that have been vacant for over two years only have to pay 5% VAT (Value Added Tax) on renovations and repair work instead of the usual 20%. That’s a big saving. However, to benefit from this reduction, the owner must prove that the property has been empty for at least 2 years by gathering evidence through utility bills and other documents issued by the Empty Homes Officer (this is someone working at the local Council dealing with empty properties).

Many people including builders and accountants don’t really understand the reduced VAT rules but given the money involved its vital every property owner takes note.

Q1. What is the two-year rule for VAT?

A property must have been continuously empty for the two years prior to any work starting. There are only 2 types of occupation that can be ignored:

Illegal occupation by squatters; or.
Non-residential use, such as storage for a business.

Q2. Who can claim the two-year empty property VAT rate?

Any owner whose property has been empty for two years or more, can claim a reduced VAT rate on the cost of returning it to lettable condition at a rate of only 5% instead of the usual 20% - that’s a massive 15% saving. The savings are significant on any refurbishment or building project in London. And if the property has been vacant for over 10 years then the owner can avoid VAT all together.

Q3. How do I get that 5% VAT rate for a renovation?

If the work is done as “qualifying renovation” and the services are “relevant services,” the contractor or supplier should only charge VAT at 5% on the works and goods supplied as part of the project. Many contractors or suppliers may be unaware so it is absolutely vital when selecting a contractor that you explain to them that expect VAT to be charged at 5% so they can get confirmation from their own accountants and avoid confusion or a big argument at the end of the project.

Q4. How do I prove my property has been empty for two years?

According to VAT Notice 708, Section 8 - Reduced rating on the renovation or alteration of empty residential premises, proof can be obtained from the Electoral Roll and Council Tax records, utility companies, Empty Property Officers in local authorities, or any other reliable source.

Q5. What if my property has been vacant for over 10 years – are there any VAT savings?

If a property has been vacant for at least 10 years, then the owner can reclaim all the VAT on any works carried out to bring the property up to a good lettable condition so they don’t even have to pay the 5%. The VAT has to be paid upfront in the first instance but then can be quickly reclaimed. For any owners who don’t have the cashflow to do this then they have the option to pay the reduced VAT at 5% so you don’t have to reclaim but for those looking to save the most VAT on a property then its best to pay the full 20% VAT and reclaim it all back thereby paying zero VAT.

Q6. What is classed as an empty property?

A long-term empty property is one which has been substantially unfurnished and uninhabited for 2 years or longer.. As such if the property has been vacant for over 2 years then the owner would only need to pay 5% VAT. If the property has been vacant for over 10 years then the owner can pay zero VAT

By taking correct advice, following these rules and ensuring to keep the all relevant paperwork and evidence, property owners can take advantage of reduced VAT or even zero VAT. Bear in mind build and renovation costs in London range from £200 per square foot to £1,500 per square foot, depending on the finish and contractor, and accordingly saving 15% or 20% on VAT amounts to a huge amount of money

Do I need to pay VAT on new-build property in London?

Building a new house in London is a very expensive project. The average construction cost of a new build property in UK is around £200 per square foot but in London, if there’s a basement, it can run to over £1,000 per square foot. So for a new build property with a net internal area of 1,500 square feet, the total build cost (not including the land cost or any legal and stamp duty costs) would be anywhere from £300,000 to £1,500,000.

Fortunately the UK Government offer a significant saving for individual, they offer reduced VAT (Value Added Tax) to 0% on new build properties, however there are a number of items that are excluded. It’s vital therefore, for anyone contemplating building a new home project, to check the rules.

Many including builders and accountants don’t understand how the zero VAT works and therefore given the sums involved it is imperative every property owner takes proper advice.

Zero-rated new build construction:

When building a new build home from scratch, the construction element has zero VAT. This means VAT registered contractors should not charge VAT on any associated labour or material costs. However, to qualify as a ‘new build’, the property must be a self-contained property with no doors or connections to an existing building, ensuring it can be used independently and sold separately.

VAT on consultant fees:

While the construction itself benefits from 0% VAT, VAT is still due on consultant fees such as those from architects and structural engineers if they are VAT-registered.

Case study in Highgate, London:

A client purchased a set of garages in Highgate successfully obtained planning permission for a 5,000 sq ft house with a basement. Since this property was a new build, VAT was zero on the construction costs. The construction contract was £3,225,000. With zero VAT the client saved over £645,000 in VAT.

Fixed items and Consultant fees:

The 0% VAT rate is applied to all construction costs. However, consultant fees do not benefit from 0% VAT and have to be paid at the standard 20% VAT rate.
For large projects, clients should always consult a VAT specialist, which can help identify all the items that are subject to 0% VAT and those that are subject to the full 20% VAT rate.