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Converting a Property Into a HMO?

Specialist property accountant Stephen Fay FCA, comments on how to save up to 75% of your VAT costs.

A common property investment strategy is to buy a property and  convert it into a HMO. This can be an expensive strategy however, not helped by the 20% VAT charged by suppliers and builders. However, in many cases it is possible to pay up to 75% less VAT for certain ‘qualifying’ conversions.

Why can’t I just VAT-register and reclaim all of the VAT I incur, just like many businesses do?
Residential rental income is completely exempt from VAT, and so it isn’t even possible to VAT-register a residential rental business. This is unlike a commercial property rental business, or even a ‘Furnished Holiday Let’ (also known as ‘Serviced Accommodation’) business. Therefore, it isn’t possible for a single-let or HMO landlords to claim back any of the VAT that they incur on a property refurbishment project.

So what’s different about HMO conversions?
There are special provisions which can mean that ‘qualifying’ property conversions, most commonly a conversion of a single-let property to a HMO property, qualify for a 5% reduced rate of VAT.

The 5% VAT rate applies to materials and services related to the conversion, and any repairs or construction works within the immediate vicinity of the building site e.g. a garage.

What exactly is a ‘qualifying conversion’?
A ‘qualifying’ HMO conversion is one where:

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