VAT on new build and conversion property explained

Commercial property VAT has three possible outcomes. Most sales of existing commercial property are exempt from VAT, which means no VAT is charged but the seller cannot recover the VAT on related costs. A brand new commercial building, broadly one less than three years old, is standard rated at 20% by default. And an otherwise exempt building becomes standard rated where the owner has made an option to tax, a decision to charge VAT so they can reclaim VAT on their own outlay.

So on any commercial purchase the questions are: is the building new, and has the seller opted to tax? If either is true, 20% VAT is added to the net purchase price, payable at completion. A VAT registered buyer using the property for taxable business can usually reclaim that VAT, but the cash still has to be found on the day. That timing gap is the reason VAT bridging finance exists.

There is no VAT on a new build home because HMRC zero rates the construction and first sale of new residential property. Zero rating is not the same as exempt. It means VAT is technically charged at 0%, so the buyer pays nothing extra, and the developer can still recover the VAT on construction costs. The policy aim is to keep the cost of new housing down.

The relief is specific. It applies to a genuinely new dwelling or certain buildings used for a relevant residential or charitable purpose, sold or granted a long lease by the person constructing it. New commercial property does not get this treatment, which is why a new office, warehouse or retail unit is standard rated rather than zero rated. The gov.uk guidance in VAT Notice 708 sets out the conditions in full.

Some conversions qualify for a reduced rate of 5% rather than the standard 20%. This is aimed at bringing property back into residential use. In broad terms the reduced rate can apply where a building is converted so that the number of dwellings changes, where a property is converted into a home used for a relevant residential purpose, or where a home has been empty for two years or more before renovation work begins.

• Converting a non-residential building, such as a barn or office, into one or more homes.
• Changing the number of dwellings, for example splitting a house into flats or combining flats into a house.
• Renovating a residential property that has stood empty for at least two years.

Separately, the sale of a non-residential building that has been converted into homes can be zero rated by the person doing the conversion. These reliefs turn on precise conditions and evidence, so the specific rate for your scheme should always be confirmed with your accountant before you rely on it.

VAT is charged at 20% on the sale of a new, or nearly new, commercial building. HMRC treats a commercial building as new for roughly three years from completion, and during that window its sale is standard rated rather than exempt. After that period the sale usually becomes exempt again, unless the owner has made an option to tax.

The option to tax is the other common trigger. A property owner can choose to charge VAT on an otherwise exempt commercial property so they can recover VAT on their costs. Once made, the option generally binds future sales and rents of that property until it is revoked. A transfer of a going concern, or TOGC, can remove the VAT charge entirely where a let property is sold as a functioning business and conditions are met, including the buyer being VAT registered and, where relevant, opting to tax. Getting the TOGC conditions right is technical, so take advice before assuming no VAT is due.

A VAT registered buyer reclaims the VAT paid on a standard rated purchase through their VAT return. You pay the 20% at completion, hold a valid VAT invoice, and recover it as input tax on the return covering that period, provided the property is used for taxable business purposes. The HMRC VAT refund then follows once the return is filed and processed, commonly within one to three months.

The problem is the gap between paying and reclaiming. Twenty per cent of a purchase price is a large sum to have tied up for a quarter or more, and lenders generally advance against the net purchase price, not the VAT. Self builders and some conversion projects have a separate route, the DIY Housebuilders Scheme, to recover VAT on a new home they build for their own use. Check which route applies to your project before you complete.

A VAT bridging loan is short term finance that funds the VAT due on a property purchase, repaid when HMRC refunds the VAT to the buyer. It is useful precisely where the main lender will not cover the VAT element, which is common on standard rated commercial buildings, opted properties and some mixed use conversion sites.

The mechanics are straightforward. The VAT bridge covers the 20% at completion so the deal is not held up, then the HMRC VAT refund is the built in exit. Terms are short, often three to six months to allow for the reclaim, and interest is usually handled by interest roll-up so there are no monthly payments to find. A VAT bridge typically sits behind the senior commercial mortgage or development finance as a second charge, or can be a standalone first charge where there is no other borrowing.

• The main lender advances against the net price and will not fund the VAT.
• You need the VAT paid quickly, for example on an auction purchase with a tight completion.
• You want to keep cash in the project rather than lock 20% up until the refund.

Because the exit depends on a successful reclaim, it is worth confirming the VAT is genuinely recoverable before you borrow. VAT bridging on property is commercial finance and is not regulated by the FCA. If a VAT bridge would suit your new build or conversion purchase, we can help you compare options.