Residential letting — VAT exempt
Key point
Residential rents are VAT-exempt — not zero-rated. This means no VAT is charged on the rent AND input VAT on related costs cannot be reclaimed from HMRC.
- Exempt income does not count towards the £90,000 VAT registration threshold
- VAT on management fees, repairs, and professional services is an irrecoverable cost
- Standard HMO lettings where the accommodation is the occupant's home are treated as VAT-exempt residential lettings
When VAT registration is required
- Commercial property lettings with the option to tax elected: VAT-taxable rental income above £90,000 triggers registration
- Serviced accommodation with hotel-type services (meals, daily cleaning, linen): may be a taxable supply requiring registration above £90,000
- Development activities generating taxable supplies (zero-rated new residential dwellings) above £90,000
- Mixed business activities (letting agency, building business) with taxable turnover above £90,000
The option to tax — commercial property
- Electing to opt to tax converts commercial property lettings from exempt to taxable at 20% — allowing input VAT recovery on renovation and professional costs
- The election is irrevocable for 20 years — a long-term commitment
- VAT-exempt tenants (charities, banks, insurance companies) cannot recover the VAT, making opted properties more expensive for them
- Notify HMRC using Form VAT1614A; the election applies per property, not per landlord
Partial exemption on mixed portfolios
- Where a landlord makes both exempt (residential) and taxable (opted commercial) supplies, input VAT must be apportioned between activities
- De minimis rule: if irrecoverable input VAT is below £625/month on average AND 50% or less of all input VAT, all input VAT can be recovered
- Standard method: apportion overhead input VAT by ratio of taxable to total turnover
- Specialist VAT advice is required — errors in partial exemption calculations attract HMRC assessments