Guildford: PKF advises landlords on tax savings

Landlords and property owners will soon have their first opportunity to revoke an option to tax so future sales or lettings of a property can be exempt from VAT.

Nick Warner, director of VAT in the Guildford office of PKF, said: “Property owners will have new opportunities to save VAT and should review the VAT status of all their older properties.”

The option to tax was first introduced in 1989 to allow businesses to elect to charge VAT on a commercial property, thereby allowing VAT recovery on construction or refurbishment costs. An option may be revoked where more than 20 years has elapsed since it first had effect so, from 1 August 2009, an owner who opted to tax a property on 1 August 1989 will have the first opportunity to remove it.

Warner explained: “Revoking the option to tax may benefit landlords and owners who want to attract a tenant or purchaser who cannot recover all or any of the VAT they pay. Making the rent or sale price of a property VAT-free would make it much more attractive to financial services organisations, charities, education and health providers.”

There are also some direct tax benefits of revocation: for example, Stamp Duty Land Tax (SDLT) is payable by the purchaser on the VAT inclusive purchase price, so the removal of VAT from the property value would also save a purchaser up to 0.6% of the purchase price in SDLT . This could be used by the vendor to negotiate a more favourable price.

However, Warner pointed out: “Before making an application to HMRC to revoke an option, the full ramifications of revocation should be considered. For example, the purchase or refurbishment of a property with a net value of over £250,000 falls within the capital goods scheme, under which VAT recovered on costs is adjusted over a ten year period. If the option to tax is revoked before the ten year period expires, part of the VAT claimed would have to be paid back to HMRC.

“Fortunately, where the net value of the refurbishment is less than £250,000, then only VAT recovered in the last year need be considered. Provided the option is not revoked until the end of the VAT year in which the refurbishment works are carried out, (normally the end of March, April or May), the landlord should enjoy the benefit of both full VAT recovery on the refurbishment and selling or letting the property free of VAT the following year.

“Despite the slump in property market, the amounts of money involved in real estate transactions remain high and misjudging the VAT position can be costly. Landlords and property owners should take professional advice to see if they can save VAT on their older properties.“