Do you charge VAT on residential rent

Q: How does this work in practice?

Illustration only. A landlord owns six flats let on assured shorthold tenancies and is not VAT registered. In one year she pays a roofer £6,000 plus VAT of £1,200 and a letting agent £4,000 plus VAT of £800. The rent is exempt, she cannot register for VAT on the strength of it, and none of the £2,000 VAT can be reclaimed. For income tax, HMRC's Business Income Manual at BIM31535 treats VAT that a person cannot recover as part of the cost of what was bought, so the expenses are claimed at their VAT inclusive amounts. If she later converts the ground floor shop she owns below the flats into a seventh flat, the builder may be able to charge 5% on the conversion work instead of 20%, which is the only VAT saving open to her.

No. Letting a house or flat as someone’s home is exempt from VAT, so a landlord never adds VAT to residential rent. Unlike commercial property, a landlord cannot opt to tax a dwelling, because the law switches the option off for homes, and the price of that exemption is that VAT paid on repairs, agents’ fees and refurbishment is normally a cost the landlord cannot reclaim.

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Why is residential rent exempt from VAT?

Section 31 of the VAT Act 1994 makes the supplies listed in Schedule 9 exempt, and Item 1 of Group 1 of that Schedule covers the grant of any interest in or right over property, or any licence to occupy it. HMRC’s VAT Notice 742, paragraph 2.2, explains that a grant includes creating a lease or a letting, so an assured shorthold tenancy, a longer residential lease and a licence to occupy a room all fall within the exemption.

Notice 700/1, paragraph 2.6, lists “certain selling, leasing and letting” of property among its examples of exempt supplies, while noting that lettings of garages, parking spaces and hotel and holiday accommodation are not exempt. Exempt is not the same as zero rated: a zero rated supply is a taxable supply at 0%, while an exempt supply is not a taxable supply at all. That difference decides whether VAT on costs can be recovered, as explained in zero rated vs exempt supplies.

Which lettings of homes are not exempt?

Item 1 lists exceptions that are taxed at the standard rate even though they involve the right to occupy a building. The two that catch residential property owners are:

Hotel style accommodation. Paragraph (d) excludes sleeping accommodation in a hotel, inn, boarding house or similar establishment. Note (9) says a similar establishment includes premises providing furnished sleeping accommodation, with or without board, used by or held out as suitable for visitors or travellers. Serviced apartments marketed to short stay guests can fall here.
Holiday accommodation. Paragraph (e) excludes holiday accommodation, which Note (13) defines as accommodation advertised or held out as holiday accommodation or as suitable for holiday or leisure use.

The test is how the property is let and marketed, not the type of building. The same cottage let on a tenancy as someone’s home is exempt; let by the week to holidaymakers it is standard rated, currently at 20%. See VAT on holiday accommodation for that side of the line.

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Can a landlord opt to tax a house or flat?

No. The option to tax lets an owner turn exempt property supplies into taxable ones, but paragraph 5(1) of Schedule 10 to the VAT Act 1994 says an option has no effect on any grant of a building, or part of a building, designed or adapted and intended for use as a dwelling or number of dwellings, or solely for a relevant residential purpose. Notice 742A, paragraph 3.2, confirms the option will not apply to a house or a block of flats and that no certificate is needed, although HMRC recommends keeping evidence of the intended use.

This catches landlords with mixed buildings. A landlord who has opted to tax a parade of shops can charge VAT on the shop rents, but the flats above stay exempt. Relevant residential use, such as a care home or student hall, is also outside the option where the buyer or tenant tells the landlord of that use; Notice 742A paragraph 3.3 recommends getting that confirmation in writing. A commercial building sold or let for conversion into homes can be taken outside the option with a certificate on form VAT1614D (paragraph 3.4). The general mechanics are in the option to tax.

Are service charges and utility recharges exempt too?

Usually, yes. Notice 742, paragraph 12.1, says service charges paid by the holder of a residential lease or tenancy are further payment for the landlord’s exempt supply of an interest in property. Paragraph 12.3 adds that a separate charge for unmetered gas and electricity used by occupants is also treated as further payment for the exempt accommodation. If the landlord operates a secondary credit meter, though, the energy is a separate supply of fuel and power charged at the reduced rate.

Optional extras are different. Paragraph 12.3 says services supplied directly to occupants that are not linked to the tenancy, such as shopping, cleaning or internal decoration of the flat, are fully taxable. A VAT registered landlord who sells a cleaning package alongside a tenancy needs to account for VAT on that package even though the rent stays exempt.

Can a residential landlord register for VAT to reclaim costs?

Not if residential lettings are the only business. Notice 700/1 says that if all your supplies are exempt, you will not be able to register for VAT, and paragraph 3.4 says exempt supplies are left out when working out taxable turnover. GOV.UK confirms that you do not have to register if you only sell exempt or out of scope goods and services, however large the rent roll.

Recovery also depends on what the costs are used for. Section 26 of the VAT Act 1994 only allows credit for input tax attributable to taxable supplies (and certain supplies made outside the UK). VAT on a roof repair, a letting agent’s fee or a new kitchen in a rented flat is attributable to exempt rent, so it is not recoverable even by a landlord who happens to be registered for another business. The agent’s side of this is covered in VAT on letting agents’ fees.

What if the landlord is VAT registered for another business?

A company or individual that is already VAT registered, perhaps for a trade or for opted commercial property, and also lets homes becomes partly exempt. VAT on costs used only for the residential lettings is exempt input tax and cannot normally be reclaimed; VAT on shared overheads has to be apportioned under the partial exemption rules in Notice 706.

There is a small business tolerance. Notice 706, paragraph 11.2, allows a business to be treated as fully taxable if its exempt input tax is not more than £625 per month on average and not more than half of its total input tax. A trader with one buy to let flat and modest repair bills may sit inside those limits; a refurbishment project usually will not. See partial exemption and the de minimis limits.

Can the VAT cost be reduced in other ways?

Because recovery is blocked, the useful reliefs are the ones that let the builder charge less VAT in the first place. Notice 708 sets out the main ones:

building a new dwelling is generally zero rated, and so is the first sale or long lease of it by the person constructing it (Notice 742, paragraph 3.1, and Notice 708);
converting premises into a different number of dwellings, or turning non residential premises into homes, can be charged at 5% (Notice 708, section 7);
renovating a home that has not been lived in during the two years before work starts can be charged at 5% (Notice 708, section 8), covered in renovating empty homes;
installing qualifying energy saving materials in residential accommodation is zero rated from 1 May 2023 to 31 March 2027, reverting to 5% from 1 April 2027 (Notice 708/6).

How does this work in practice?

Illustration only. A landlord owns six flats let on assured shorthold tenancies and is not VAT registered. In one year she pays a roofer £6,000 plus VAT of £1,200 and a letting agent £4,000 plus VAT of £800. The rent is exempt, she cannot register for VAT on the strength of it, and none of the £2,000 VAT can be reclaimed. For income tax, HMRC’s Business Income Manual at BIM31535 treats VAT that a person cannot recover as part of the cost of what was bought, so the expenses are claimed at their VAT inclusive amounts.

If she later converts the ground floor shop she owns below the flats into a seventh flat, the builder may be able to charge 5% on the conversion work instead of 20%, which is the only VAT saving open to her.

What mistakes come up most often?

Adding VAT to residential rent because the landlord is VAT registered for something else.
Applying to register voluntarily on the strength of residential rent alone, which HMRC will refuse.
Assuming an option to tax over a mixed building also covers the flats in it.
Treating short stay serviced lettings marketed to travellers or holidaymakers as exempt residential lettings.
Reclaiming VAT on refurbishing let flats in a partly exempt business without carrying out the partial exemption calculation.
Missing a reduced or zero rate on conversion, empty home or energy saving work, which is the only way to cut the VAT cost.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.