I have a client whom is a sole trader and VAT registered that is buying a commercial property for his daughter to use. The property will be purchased for cash rather than via a mortgage. Once purchased he will redevelop the property which will result in him incurring VATable supplies that he wants to reclaim the VAT on. By doing this he is effectively opting to tax, meaning he will have to charge VAT on the rent that he charges. However, he doesn't want to charge his daughter rent
Two questions, firstly where will he stand regarding claiming the VAT back on the renovation costs and then not charging any rent? His view is that the property is an investment and he is not bothered about receiving an income from it at the moment.
Secondly, what are the implications regarding self assessment if he is charging rent below the commercial value, or in this instance not at all?
Replies (4)
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Commercial Property
A couple of questions first - is the client paying/claiming VAT on the purchase of the property? Is the property more than 3 years old?
If he wants to claim VAT on renovation, then he has to opt to tax a rental property. He has to notify HMRC of the option (form VAT 1614A).
If he is not planning to receive an income from the property then he is not in business, and cannot reclaim the VAT.
It may be wiser to charge a reduced rent to the daughter, so as to recover VAT on renovation.
But, as is often the case, he will need more detailed advice for the best outcome.
Not a VAT expert but
I understood that if you opt to tax, before purchase, and the property is held under exactly the same terms before and after sale, then it is a transfer of a going concern and no VAT is payable.
Or is that only where there is income on both sides?
Moving on renovating the property and claiming back VAT I think means he should charge a commercial rent. This would be deductible for his daughter and protect his VAT position. He would obviously be taxable on the rent so would need to receive some of the rent from her but could loan her the balance. What kind of business does she have? Done correctly investing in a business could be IHT free?
TOGC?
Since the Vendor has opted, the purchaser does need to opt, to ensure the VAT on purchase can be recovered.
The TOGC rules would apply if there is a continuing business, e.g: sitting tenant. This would mean the transaction is VAT-free.