{"id":556,"date":"2016-02-25T07:14:42","date_gmt":"2016-02-25T07:14:42","guid":{"rendered":"http:\/\/renovateme.co.uk\/blog\/?p=556"},"modified":"2018-09-07T19:16:23","modified_gmt":"2018-09-07T19:16:23","slug":"option-tax-residential-conversions","status":"publish","type":"post","link":"https:\/\/renovateme.co.uk\/blog\/option-tax-residential-conversions\/","title":{"rendered":"The &#8220;option to tax&#8221; and residential conversions"},"content":{"rendered":"<h6><strong>If you&#8217;re thinking of buying an old commercial property to convert to residential use, you need to read this blog.<\/strong><\/h6>\n<p>It will explain how you can avoid (legally!) paying VAT on the property purchase.<\/p>\n<p>Pub conversions are one of the most common types of conversion nowadays.\u00a0 The breweries have been selling off unused properties for several years now and you can often find a decent property in the price range \u00a3100,000 &#8211; \u00a3200,000 depending on size, location and various other factors.<\/p>\n<p>If you make enquiries about purchasing one of these properties, chances are that you&#8217;ll be told that the brewery has &#8220;opted to tax&#8221; the property and must charge VAT on the sale.\u00a0 This means, of course, that there will be an additional 20% VAT on the selling price, which could simply be too expensive for your budget.<\/p>\n<p>As I&#8217;ll explain below,\u00a0you can issue a &#8220;VAT 1614&#8221; certificate to tell the vendor not to charge VAT.\u00a0\u00a0 But it&#8217;s important\u00a0to understand\u00a0main principles of\u00a0the &#8220;option to tax&#8221; what is all about,\u00a0 how it can apply to property purchases and how it can affect how much you pay for the property.<\/p>\n<p><strong>Commercial property and VAT<\/strong><\/p>\n<p>There are different VAT rules for &#8220;commercial&#8221; property and &#8220;residential property&#8221;.\u00a0\u00a0 The term &#8220;commercial property&#8221; isn&#8217;t defined in the VAT legislation;\u00a0 we use the term to distinguish it from &#8220;residential&#8221; property, which includes certain defined types of property including dwellings, residential homes and certain properties for charitable use.<\/p>\n<p>The main differences are:<\/p>\n<ul>\n<li>Construction, conversions and renovations of most residential properties zero-rated or at the 5% VAT rate.<\/li>\n<li>The construction of, or any other work done to commercial property, including buildings, land , or civil engineering works is liable to VAT at 20%.<\/li>\n<\/ul>\n<p>You might assume that this doesn&#8217;t matter, because businesses can claim VAT on their costs from HMRC.\u00a0 However, it&#8217;s not that simple. \u00a0If you sell or rent either commercial property or existing residential property, <strong><em>your income is normally exempt from VAT and this means that you can&#8217;t normally claim VAT on your costs<\/em><\/strong><em>.<\/em><\/p>\n<p><strong>This is where the &#8220;option to tax&#8221; comes into play.\u00a0 <\/strong><\/p>\n<p>The &#8220;option to tax&#8221; allows property owners to charge VAT on <u>commercial property<\/u> sales or rentals.\u00a0 This means that owner adds VAT to the sales price or rent AND can claim VAT on his costs.<\/p>\n<p><strong><em>That&#8217;s why you could be charged VAT if you buy an old pub or office or warehouse with the intention of converting it to residential use, whether for your family home; or to sell or rent as a business activity.<\/em><\/strong><\/p>\n<p>Thankfully, there is a procedure which enables purchaser of such properties to tell the vendor that they can&#8217;t charge VAT on the property sale, which does sound a bit odd!<\/p>\n<p>The reason is because under EC VAT principles, members of the public should not pay VAT on the cost of their homes, whether you own or rent the property.\u00a0 And <strong><em>even if you can claim VAT on your materials or certain construction services, such as under the self-build or DIY conversion schemes, you can NOT claim VAT on the purchase of the property.<\/em><\/strong><\/p>\n<p>So it&#8217;s essential that you know about this procedure and how it works so that you don&#8217;t end up with an extra 20% cost that could easily be avoided.<\/p>\n<h6><strong>The VAT 1614D procedure<\/strong><\/h6>\n<p>These are the main principles:<\/p>\n<ul>\n<li>If you&#8217;re planning to use or convert the property into a dwelling or other residential or for certain charitable purposes, you can issue a VAT 1614 certificate telling the vendor that his option to tax must be &#8220;disapplied&#8221;;\u00a0 which means that you can buy the property exempt from VAT.<\/li>\n<li>The certificate must be issued to the vendor before the price is legally fixed, which is defined in the law and usually means exchange of contracts or similar.<\/li>\n<\/ul>\n<p>The detailed rules are set out in HMRC VAT Notice 742a: Opting to tax land and buildings, section 3 http:\/\/tinyurl.com\/qbrewhq, especially 3.4 onwards.<\/p>\n<p><a href=\"\/\/renovateme.co.uk\/blog\/wp-content\/uploads\/ink-295318_1280.png\" data-imagelightbox=\"g\"><img loading=\"lazy\" class=\"alignnone size-medium wp-image-562\" src=\"\/\/renovateme.co.uk\/blog\/wp-content\/uploads\/ink-295318_1280-300x242.png\" alt=\"ink-295318_1280\" width=\"300\" height=\"242\" srcset=\"https:\/\/renovateme.co.uk\/blog\/wp-content\/uploads\/ink-295318_1280-300x242.png 300w, https:\/\/renovateme.co.uk\/blog\/wp-content\/uploads\/ink-295318_1280-1024x827.png 1024w, https:\/\/renovateme.co.uk\/blog\/wp-content\/uploads\/ink-295318_1280-1200x969.png 1200w, https:\/\/renovateme.co.uk\/blog\/wp-content\/uploads\/ink-295318_1280.png 1280w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/><\/a><\/p>\n<p>The VAT 1614 procedure is, for the most part, a relatively straightforward procedure, but it does deal with a complex bit of VAT law and can seem a bit strange to those with limited VAT experience.\u00a0 There are several practical issues &#8211; for example what do you do if you&#8217;re buying a property at auction, does issuing mean the certificate mean that you have to purchase the property concerned\u00a0 and will the vendor increase the price if I give them the certificate?<\/p>\n<p>I&#8217;ll discuss some of the most common practical issues in my next blog, but don&#8217;t hesitate to contact me if you have any queries in the meantime.<\/p>\n<p><strong>Marie<\/strong><\/p>\n<p><strong>February, 2016<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>If you&#8217;re thinking of buying an old commercial property to convert to residential use, you need to read this blog. It will explain how you&hellip;<\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[172],"tags":[39,67,70,89],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v16.8 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>The &quot;option to tax&quot; and residential conversions -<\/title>\n<meta name=\"description\" content=\"Marie Stein explains the option to tax, when it affects residential property conversions and when to use the VAT 1614 certificate\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/renovateme.co.uk\/blog\/option-tax-residential-conversions\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The &quot;option to tax&quot; 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