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Firstly when it comes to VAT on converting a commercial property to a residential, it’s important to understand what rate of VAT will be charged.
Typically, when a property undergoes conversion works, the VAT is charged at a standard rate of 20%, but in certain scenarios, there are exceptions and a reduced rate of 5% may apply.
When does a reduced VAT rate of 5% apply?
A reduction in the chargeable VAT rate applies in the following scenarios:
• Commercial to residential conversions
• Conversions involving an increase in the number of dwellings, for example, converting a house into flats
• Renovating a residential property that has been vacant for more than 2 years
What does the reduction in VAT apply to on commercial to residential conversions?
The reduction in VAT applies to the following scenarios:
• Work on the structure of the building including the addition/removal of walls, roofs, floors, stairs, windows & doors.
• The addition of basic facilities such as plumbing and electricity.
If the contractor purchases the materials for the works, the VAT should be charged at the reduced rate of 5%.
If the incorrect VAT rate is applied, it cannot be refunded by HMRC; you would need to pursue the contractor directly to reclaim the excess.
When does the reduction in VAT not apply to commercial to residential conversions?
The reduction in VAT does not apply to professional services such as solicitors, architects & surveyors.
In addition to this, it does not apply to the purchase and installation of materials that are not building materials, for example, carpets and furniture.
Who funds the VAT for commercial to residential conversions?
If you are looking to retain the property and let this out as an investment, it is classed as an “exempt supply” and as such the VAT cannot be claimed back. In this instance, lenders can fund up to 100% of the works inclusive of VAT as part of a works-funded facility.
Therefore, when obtaining quotes for the conversion costs, it is important that the correct VAT is applied.
If you are looking to sell the property once works are completed, the lenders will not fund the VAT as this is classed as “Zero Rated” and as such, you can reclaim the VAT on the commercial to residential conversion costs.
How can Advocate Finance help?
Our advisers here at Advocate Finance are experts in commercial to residential conversions. Thanks to our profound relationship with our lending partners we have the facility to arrange mortgages & loans for both the acquisition and conversion costs of your commercial to residential conversion projects.
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