Exploring Options to Tax Land and Buildings

Understanding VAT Exemptions and Options

When it comes to property rentals, VAT (Value Added Tax) can be a bit of a complex topic. Typically, properties rented out are exempt from VAT. This exemption means that landlords cannot charge VAT to their tenants. Consequently, landlords also cannot reclaim any VAT incurred on their expenses related to the property.

However, there’s an option available that can change this dynamic: the option to tax land.

What is the Option to Tax Land?

The option to tax land allows landlords to charge VAT on their rent to tenants. This option also enables landlords to reclaim VAT on their property-related expenses. Essentially, by opting to tax, a business can turn what is typically a VAT-exempt activity into one that involves VAT.

Advantages of Opting to Tax Land

1. Reclaim VAT on Expenses: The primary advantage of opting to tax land is the ability to reclaim VAT on allowable expenses. For instance, if you purchase a commercial property and decide to undertake renovations, you can reclaim the VAT incurred during the renovation process. This can significantly reduce your overall expenses.
2. Financial Benefits: The ability to reclaim VAT can make a substantial financial difference, especially for businesses that invest heavily in maintaining or improving their properties.

Disadvantages of Opting to Tax Land

1. Market Limitations: One of the main drawbacks is that selling a non-residential property with an option to tax can be more challenging. The market for such properties is smaller, as not all potential tenants will be willing or able to pay VAT on their rent.
2. Long-Term Commitment: The option to tax land applies to a commercial property for a 20-year period. This long-term commitment can pose challenges. If your tenants leave during this period, finding replacements might be more difficult due to the VAT charges on rent.
3. End of the Period: At the end of the 20-year period, the property reverts to being VAT-exempt on both expenses and income. This shift means that any VAT benefits gained during the period will no longer apply.

Conclusion

Opting to tax land and buildings is a significant decision with both advantages and disadvantages. The financial benefits of reclaiming VAT on expenses can be substantial, but the long-term implications and market limitations require careful consideration.

If you need further advice or have specific questions about the option to tax land and buildings, feel free to contact our BTL team at PJCO. We’re here to help you navigate these decisions and find the best solutions for your property management needs.

---

Please get in touch on 01273 441187 or book a discovery call with one of our expert accountants. 
Contact

You May Also Like…

• ❮ Previous
• Next ❯