Recovering VAT on buy to let property costs
As a general rule, the letting of residential property is regarded as an exempt supply for VAT purposes. Put simply this means that no output VAT is charged on rents received and VAT on costs cannot be reclaimed. In certain circumstances though, recovering VAT on buy to let property costs can be made. This might be particularly beneficial for example when you have bought a property and have to incur redecoration costs prior to letting.
If you are a VAT registered business which also happens to be letting residential property recovering VAT on buy to let property costs might be possible. In some cases you could recover up to £7,500 of input VAT relating to a property letting business by using the VAT partial exemption rules.
VAT partial exemption - recovering VAT on buy to let property costs
As long as the VAT which relates to exempt supplies (in this case residential letting) is within the de-minimis limits then a claim can be made.
If a business passes any of the three tests below then a claim can be made. The three de-minimis tests for VAT partial exemption are as follows:
Example - recovering VAT on buy to let property costs
If you look at the example below you can see how recovery VAT on buy to let property costs works in practice.
John runs a plumbing and heating business as a sole trader. He lives in a flat near his industrial unit and lets out his old house.
| Net | VAT |
|---|---|---|
| £ | £ |
Plumbing business turnover | 200,000 | 40,000 |
Rental income | 10,000 | Exempt |
Plumbing business expenses | 140,000 | 28,000 |
Letting agent's commission | 1,250 | 250 |
Rental property repairs | 2,500 | 500 |
Accountants fees | 1,750 | 350 |
Total input VAT suffered | £29,100 |
John has a partially exempt business and must therefore must allocate his input VAT into three different categories:
John's input VAT for his expenditure is allocated as follows:
As a starting point John can reclaim all of the VAT of £28,000 because this relates to income that is VATable. John can also reclaim a proportion of the residual input VAT of £350 based on the proportion of VATable turnover (£200,000) against total turnover (£210,000). The amount that he can reclaim is £350 x £200,000 / £210,000 which is £333.
John is left with his wholly exempt VAT of £750 (the buy-to-let costs) plus the balance of the residual VAT of £17. This comes to a total of £767. If this is less than the de-mimimis amount he can reclaim all of it and if it is more than the de-minimis amount he cannot reclaim any of it.
The de-minimis amount for the year is the lower of £7,500 and 50% of total input VAT which is £14,550. John can therefore reclaim all of his input VAT, including that which relates to his exempt rental property.
Partnership issue - recovering VAT on buy to let property costs
If you hold property jointly you are considered a partnership for VAT purposes. Therefore a partnership requires a separate VAT registration to a sole trader.
Niles is a VAT registered sole trader. He owns a buy-to-let property. He claims input VAT under the partial exemption rules in relation to his buy-to-let. In 2018 he puts his buy-to-let into joint names with his 19 year old son, David. The buy-to-let is now a partnership business for VAT purposes only. Niles is now unable to reclaim any input VAT relating to the buy-to-let.
The partnership is also unable to register for VAT because it makes only exempt supplies (residential rental income).
The same partial exemption rules, equally to a scenario where you are a trading as a VAT registered limited company and own a residential letting. The topic of owning an investment property via a limited company is covered in an earlier blog here
For more useful information, check out our Ebooks here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].