Key Post: VAT on property - interest free loan?

Brendan Burgess

Brendan Burgess

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I have heard that it is fairly common nowadays for investors buying residential property to waive their VAT exemption of short term lettings and elect to register for VAT. This would mean that the investor would recover the VAT on the purchase of the premises and on fittings (cookers, fridges etc.). On an apartment costing €300k, the VAT recovered on the cost alone would be (at 13.5%) €40.5k.

The flip side is that the investor has to charge VAT on rentals, which private individuals would not be willing to suffer. Therefore, the rent received would be deemed to include VAT. For example, charging €3,000 rent every two months would mean that €521 would be payable to Revenue in VAT return.

In effect, what you're getting is an interest free loan with the loan being the initial VAT recovered and the repayments being the deemed VAT included in the rent.

Does anyone know if this is common in practice, can it be challenged by Revenue, are there other adverse implications etc?
 
Vat

I am unsure as to the situation re this but I believe that for long term lettings (11 yrs +) you can register for VAT and then reclaim the vat back. If you complete a form 4A/4B then your liability changes. This is common with the purchase of some investment prop's such as S48. Can anyone shed any light on the exact process and what are the pro's and con's of doing this.

Thanks
 
Re: reference Today's Indo

A very similar article by the same journalist appeared in the Indo a few weeks ago - I commented on it
 
Re: reference Today's Indo

This is a duplicate of my original posting
==============

The article can be accessed here if you register with independent.ie

I thought the article was totally simplistic and possibly misleading.

There is a potential cashflow advantage to be gained by a property investor if they register for VAT when purchasing a property. The whole plan works on the basis that the investor recovers the VAT on purchasing the property, charges VAT on rents and whenever the VAT remitted on rents exceeds the original reclaim amount, they are then allowed by the Revenue to de-register.

However, there are some serious pitfalls which were not mentioned in the article.

First off is the possibility of a hefty VAT charge arising (13.5% of the sale value) if the property was sold before deregistration took place.

Secondly the article was written on the basis that this could be a way for parents to help their children get on the property ladder, where the kids could pay market-value rent to the parents. However, it was not mentioned that in this situation the parents would find themselves being taxed on this income. When the initial capital allowances run out and the level of mortgage interest relief declines, the tax bills could be heavy.

Mention was made in the article of an income tax saving over five years of €20,470 on rent from the property, yet no explanation was given as to where or how this tax saving would arise.

The article also mentions that if/when the property is gifted to the child, they would have to pay capital acquisitions tax on the value of a home worth more than €365,000. - For a start the relevant 2003 CAT threshold is EUR441,198. Secondly this would be assessed on the net value of the gift (i.e net of mortgage), not the value of the house. Thirdly, there was no mention of a probable CGT hit on the house as a rental property.
 
VAT at 21% or 13.5%

The VAT on purchase price is claimed back at 13.5% but is VAT payed on the rental income charged at 21% or 13.5%?
 
Re: VAT at 21% or 13.5%

but is VAT payed on the rental income charged at 21% or 13.5%?

Is VAT an issue for rental income at all? After all rental income is assessable for income tax so why would VAT be levied? I don't think that VAT is payable by the tenant on rent either in case that's what you mean. [broken link removed] makes no mention of VAT at all.
 
Re: VAT at 21% or 13.5%

is VAT payed on the rental income charged at 21% or 13.5%?
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21% I think but as I haven't researched this, double-check it if it makes any difference to you.

Is VAT an issue for rental income at all?
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Yes - in the limited circumstances outlined above, where the landlord opts to waive their VAT exemption on letting income.

IT 70 - A Revenue Guide to Rental Income makes no mention of VAT at all.
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Revenue guides are a great and useful resource but they do no claim to be definitive guides to the tax code as denoted in legislation, statements of practice, precedents and such like. As such it is dangerous to rely solely on them when it comes to matters of tax compliance or calculation of liabilities.
 
VAT at 21% is not an interest free loan

If you are paying VAT at 21% but only claiming back 13.5% then how can it be considered an interest free loan for VAT registered investors?
All very confusing.
 
Re: VAT on investment property - interest free loan?

Revenue guides are a great and useful resource but they do no claim to be definitive guides to the tax code as denoted in legislation, statements of practice, precedents and such like. As such it is dangerous to rely solely on them when it comes to matters of tax compliance or calculation of liabilities.

Yes - that's why I couched my comment in suitably vague terms. Neither I nor AAM purport to be tax compliance experts but that doesn't mean that we can't discuss the issues on the basis of the information made publicly available by the Revenue.
 
Re: VAT at 21% is not an interest free loan

If you are paying VAT at 21% but only claiming back 13.5% then how can it be considered an interest free loan for VAT registered investors?
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Hi Geoffrey,

Okay lets look at a simple example.

House is bought for €200K. VAT claim is submitted for 13.5%. VAT reclaim will be €200K/1.135*13.5% = €23,788

Rent each year is €10K. VAT on rent is 10K/1.21*.21 = €1,735

At that rate it will take 13 years for the VAT paid to the Revenue on rents to exceed the VAT refunded by Revenue on the purchase - hence the notion of the interest-free loan.

Hi Clubman,

that doesn't mean that we can't discuss the issues on the basis of the information made publicly available by the Revenue.
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I did'nt question anyone's right to discuss anything.

My point was that the minutiae of the tax system (as with all other regulatory entities) are often much more complex than made out in online guides. Bubbles made this point on AAM last week re the Companies Office and it is a point that is very often glossed over on AAM.

The upshot is that individuals should always consult professional advisors where required as the Revenue certainly won't entertain an excuse that someone misunderstood IT70 or any other guide if any question arises in the future of an underpaid or undeclared tax liability. I'm sure you agree that, while the purpose of AAM is to inform people, the last thing we want to do is to mislead them - hence the importance (in my opinion) of pointing out to users that it is indeed dangerous to place too much reliance on Revenue Guides.
 
tax repaid.

Once the €23,788 in the above example is repaid, VAT is no longer deducted from rental income?
 
Re: VAT at 21% is not an interest free loan

Yes - once the landlord de-registers from VAT at that point. If VAT registration continues (for whatever reason) then VAT must continue to operate on rents.
 
>> VAT on property - interest free loan? KEY POST

I am looking to buy a second property for investment. My first property is rented and all is going well. If I register for VAT can anyone tell me how the initial VAT amount payable on the house purchase is recovered? What I mean is how is the money appropriated to myself, physically as in a cheque rebate or is the amount deducted from the purchase price?
 
Re: Understood

You must file a VAT return in order to claim the rebate. Following a probable VAT inspection (in the case of a sizeable claim) any rebate due will be paid by cheque or electronically to you. Be sure to obtain proper professional advice on all the implications of registration before doing so.
 
VAT reg for rental prop

If you already have one investment property it can be very complicated to but a second and reclaim VAT

There are a number of pitfalls, which could really cost you

Definetly get advice before doing anything
 
de reigister

Is it true to say that the revenue will allow you to de register for vat once you have paid back your initial rebate. I presume they can stop you from deregistering also. Has anyone actually deregistered or do they plan to in future years. Seems like another loophole the revenue will close in time.

If you already own an Investment property and not charging VAT, then surely you would have to charge VAT on both. How could you diffrentiate between the two as it is the same type of business.
 
password

That is one the the major pitfalls

If you waive your exemption you must account for Vat on all short term lettings
(There are possible structures that can be put in place to prevent this, and no not a company)

This will in reality only reduce the term of the interest free loan (from 13 years to say 7)

You can dereister but if you sell either property before you deregister you must account for Vat on the sales price (13.5%)

It is a very complicated area which possibly not be entered into without someone who dealswith it on a regular basis
(and there is not many of them reasonably priced)
 
One of the concerns with this is that even if you deregister for VAT there was still a question over whether or not the property would be deemed to be out of the VAT net. The implications being that if the property did pass out of the VAT net, the seller would not have to charge VAT on the sale. If the property did not pass out of the VAT net then the seller is obliged to charge VAT on the sale.

Clearly being obliged to charge VAT on the sale of a property is not a very pleasant thing to have to do and it is for this reason that advice should be sought before doing any of this.

The Revenue have recently (August 2006) published some guidance on this. It is pretty tough reading to say the least but i think it might be useful.

[broken link removed]
 
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