Through their family offices, high net-worth individuals often have significant property interests. When buying, selling, leasing, constructing, converting or renovating buildings, it is important that the VAT position is considered in advance of any transaction. There are many traps and pitfalls within the VAT rules waiting to catch the unwary. But sensible VAT planning could save you 20%.
The basic position is that the sale or letting of real estate is VAT exempt. There are, however, many exceptions to this rule, where 20% standard rate VAT applies. Whichever side of the transaction you are on, it is essential that the VAT treatment is correctly determined at the outset, as last minute VAT surprises can be a deal breaker.
Broadly, VAT-exempt property transactions are bad news for the seller/landlord, as VAT on associated costs (e.g. legal costs, agent’s fees, etc.) is unlikely to be reclaimable from HMRC. On the other hand, transactions which are subject to standard rate VAT may be unattractive to the purchaser, if it is unable reclaim the VAT charged. The good news is that there are many ways in which sensible VAT planning can overcome these issues. However, as VAT is a tax that works in real time, it needs to be thought about well in advance of the transaction taking place. Leaving it until after the event will almost certainly be too late.
Similarly, there are many opportunities to reduce VAT costs when undertaking construction work, whether this is in the course of a business activity (e.g. property development) or in a private capacity (e.g. constructing or renovating a private residence). Although the basic position is that 20% standard rate VAT applies to construction services, there are a wide range of VAT reliefs available which can reduce the VAT cost or eliminate it entirely. For example, the 5% reduced rate of VAT is not widely known about, but it covers a wide range of residential conversions and renovations. There is also the zero rate of VAT (i.e. VAT at 0%) for the construction of a variety of residential and charitable use buildings.
Where VAT is charged on construction services (either at 20% or 5%) it may be wholly or partly reclaimable, either by registering for VAT or through the special scheme for DIY builders and property converters, depending on the precise circumstances. The time limits for making a claim can be very short, so seeking advice at an early stage is essential.
For advice on the above or any other VAT matters, please contact our family office VAT specialist, Lisa Burnside