145: How to seriously reduce your VAT bill on your next property deal, and my monthly property update

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5% VAT on HMO conversionAs always it’s been a busy month for us at Inside Property Investing HQ. There are properties we’re buying, properties we’re selling, and properties we’re refinancing, but I’ll save all of that for later as you know we’re regularly joined by the one and only Simon Misiewicz to discuss all things property finance related, and this month he’s got some amazing potential savings for us!

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0% and 5% VAT Rate on Property Investments

On this month’s update, Simon and I went into detail on the different circumstances under which you can significantly reduce your VAT build on property development projects.

It’s well worth a listen to understand the details of where you can pay reduced rate VAT (there are more scenarios than you probably first thought), but the basic gist of it seems to be that if you’re creating new homes (typically by building, but in some cases also converting commercial to residential) then you should be able to completely remove VAT charges on a lot of the work.

If you’re changing an existing dwelling into a different type or number of dwellings (e.g. turning a house into flats), then a 5% VAT rate is payable on a lot of materials and labour – a big saving from the usual 20%.

5% VAT on HMO Conversions

A big takeaway for me was that the conversion of a house into an HMO comes under the 5% VAT rate. It was such a big surprise to discover this as I’ve been naively paying 20% VAT on conversions up until this point, and I’ve spoken to a lot of other HMO investors who’ve been doing the same.

Simon has very kindly written an article on the specifics of HMO conversions and the 5% VAT rate which you can find here – http://www.optimiseaccountants.co.uk/cut-vat-from-20-to-5-on-conversions-self-contained-hmos-bedsits

Paying VAT on Property Purchases

Another important thing we touch on is the ability to ‘misapply’ VAT on commercial property purchases, when it’s being purchased for the purpose of converting it into residential dwellings.

You may be aware that when you are buying VAT rated commercial property for conversion purposes, you can remove the VAT burden by using the VAT 1614D form, but did you also know that stamp duty is calculated based on the purchase price plus VAT, so disapplying VAT on your purchase will also reduce your stamp duty bill!

What Can We Reduce the VAT Rate On?

Unfortunately we can’t reduce the VAT rate on every cost of a property project, and it can get a little complicated around what can and can’t be reduced.

Simply speaking, professional services like architects and surveyors are still liable for the full 20% VAT, and similarly a lot of items that aren’t part of the fabric of the building (e.g. carpets, curtains etc) will be liable for 20% VAT as well.

You can still get reduced rate VAT on a whole host of other costs though, including all of your building materials, labour costs, and the provision of services like water, power and drainage.

The best way to make sure you’re claiming all that you can without breaking the law is to follow Optimise’s guide to allowable costs, which you can download here.

Further Reading

A lot of the detail of what qualifies for 0% and 5% VAT rates is covered on the government’s VAT Notice 708 (https://www.gov.uk/government/publications/vat-notice-708-buildings-and-construction/vat-notice-708-buildings-and-construction#reduced-rating-the-conversion-of-premises-to-a-different-residential-use), and you can read about their criteria for qualifying HMO conversions in section 7.4.

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2 Responses

  1. Did Gary Dodds of HMRC confirm (in writing) that conversion from a house into an HMO no longer requires the residential units to be self-contained?

  2. Gary Dodds referred us to the law VATA 1994 schedule 7a and confirmed that Houses of multiple occupation that is a change of use from single let will be allowed in regards to VAT reduction.

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