Reclaiming VAT on investment property

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Parnell

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I paid 250000 for an investment property. My accountant tells me I should register for vat and I will get a lump sum from the Revenue of 13.5% of Purchase price. I will have to pay vat on rental income at 21% and will eventually have to repay all the lump sum back but I have substantial disposable income in the short-term. My question (a) if I register for vat will I pay vat as well as capital gains if I sell the apartment in 10 years time. (b) can I deregister for vat beforeI sell the property once I have repaid all the vat refund I got when I bought the property?
 
Thanks,but I need to know can I deregister just before I sell so that I will not be caught for vat on the sale!
 
Parnell

Vat on property is an extremely complex area as i am sure your accountant will tell you.

firstly you will pay tax on your rental income at your marginal rate that could be 42% not 21% big difference!!!! if your other income is over the cut off point. secondly, you will pay capital gains tax if you sell the property at a gain at 20%. thirdly if it is a residentail property it may be very difficult to charge an extra 21% of the monthly rents as not a lot of landlords do so and lastly you cannot de register for vat before the diposal you must remain registered and charge vat at 13.5% on the disposal again this may not advantageous as second hand houses would not normally be within the vat net. so in summary i would not recommend reclaiming the vat on your investment!!!!!
 
bazermc said:
Parnell

lastly you cannot de register for vat before the diposal you must remain registered and charge vat at 13.5% on the disposal again this may not advantageous as second hand houses would not normally be within the vat net.


I don't believe you are correct. It is possible to dereigster for VAT (cancel your waiver of exemption) by repaying the VAT reclaimed to the revenue and then selling the property without having to account for VAT
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Thanks to both of you-as you can see it appears to be highly complex-as a matter of interest my accountant tells me I can deregister before I sell if I have repaid the vat lump some to the revenue that I originally claimed on thye purchase.
However my solicitor tells me I cannot deregister and will pay vat on the proceeds of the sale!!!!!!
 
my solicitor and my accountant are giving me different information-one says yes you can deregister prior to selling on the property-my solicitor says the direct opposite!!-its a minefield!!
 
i think you can deregister before the sale but you may need to re register when making the sale and charge vat but i will not be a costs to you but instead to the purchaser hence my reason for saying earlier that "it may not be commercially advantageous because other second hand sellers will not be charging vat"
 
One significant downside to registering for VAT for this purpose is the possibility of future legislative changes in this area. For most investors the question of current deregistration formalities is irrelevant - what will affect them are the rules governing deregistration whenever they sell the property.

If the State can spot some way to squeeze more money out of landlords by changing some aspect of this scheme in years to come, they will be sorely tempted to do so.
 
bazermc said:
i think you can deregister before the sale but you may need to re register when making the sale and charge vat but i will not be a costs to you but instead to the purchaser hence my reason for saying earlier that "it may not be commercially advantageous because other second hand sellers will not be charging vat"
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You arent going to get the answer here, only speculation and opinion. My accountant has told me that his interpretation of the law is that you can deregister before the sale, once VAT due is paid. I dont think for one second I would EVER approach a solicitor for advice on this matter...mine doesnt even know what to charge for Stamp duty.

Also, bazer mentioned above
bazermc said:
thirdly if it is a residentail property it may be very difficult to charge an extra 21% of the monthly rents as not a lot of landlords do so
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this is incorrect, you can call what you charge in rent as VAT inclusive, just make sure you declare and pay the VAT due!
 
yes but that would leave you with a shortfall as you are paying revenue a chunck of your rental income leaving you with a cashflow problem thats why you do not get landlords of residential property recovering the vat on there investment
 
This is how I think the it works.
I am not a tax expert so could be wrong

firstly you will pay tax on your rental income at your marginal rate that could be 42% not 21% big difference
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You pay tax on your rental profit not income

that could be 42% not 21% big difference
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Surely this would save you tax

yes but that would leave you with a shortfall as you are paying revenue a chunck of your rental income leaving you with a cashflow problem thats why you do not get landlords of residential property recovering the vat on there investment
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Effectivelly you are getting an interest free loan from revenue for the value of the VAT element

Example Vat Element of new house 54,000. You take out a loan for the amount excl VAT
Say Annual Rental in area 12,000
You also charge 12,000 incl of VAT
VAT element 2,083 @ 21% (not sure if this is correct rate)
Rental Income for you is 9,917 (tax will be lower)
Less expenses (interest relief will be smaller so tax will be higher)

Remember losses can be carried forward until profit is made
You return 2,083 per annumn until the vat of 54,000 is repaid
You can also reclaim vat in respect of any work done on the house, including legal etc
You can then deregister from VAT
You really need to crunch the figures to see if its worthwhile. Saving could be minimal for the effort involved.
Don't know if you can deregister prior to VAT being repaid
 
trust me i am a tax consultant and accountant with a big 4 firm..... dont bother recovering vat on investment properties......vat on propety is extremely complex and is designed such that you will not end up making a profit from it at the expense of revenue
most second hand homes like the ones on myhome.ie do not have vat built into the price so when you charge vat at 13.5% you are automatcially at a dissadvantage.
 
with regard to degistering before sale this is possible but you will need to reregeister in respect of the sale as the threshold for the sale of properties is nil and vat is chargeable on the sale as you received a vat refund on your acquisition
 
most second hand homes like the ones on myhome.ie do not have vat built into the price so when you charge vat at 13.5% you are automatcially at a dissadvantage.
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What about claiming VAT on a new build and letting the property

with regard to degistering before sale this is possible but you will need to reregeister in respect of the sale as the threshold for the sale of properties is nil and vat is chargeable on the sale as you received a vat refund on your acquisition
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So whatever you receive when selling the property you have to pay VAT to revenue.
 
asdfg said:
This is how I think the it works.
I am not a tax expert so could be wrong


You pay tax on your rental profit not income


Surely this would save you tax



Effectivelly you are getting an interest free loan from revenue for the value of the VAT element

Example Vat Element of new house 54,000. You take out a loan for the amount excl VAT
Say Annual Rental in area 12,000
You also charge 12,000 incl of VAT
VAT element 2,083 @ 21% (not sure if this is correct rate)
Rental Income for you is 9,917 (tax will be lower)
Less expenses (interest relief will be smaller so tax will be higher)

Remember losses can be carried forward until profit is made
You return 2,083 per annumn until the vat of 54,000 is repaid
You can also reclaim vat in respect of any work done on the house, including legal etc
You can then deregister from VAT
You really need to crunch the figures to see if its worthwhile. Saving could be minimal for the effort involved.
Don't know if you can deregister prior to VAT being repaid
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No you cannot deregister before the vat is repaid-thanks for all the help
 
Parnell said:
My question (a) if I register for vat will I pay vat as well as capital gains if I sell the apartment in 10 years time. (b) can I deregister for vat beforeI sell the property once I have repaid all the vat refund I got when I bought the property?
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(A) When you have repaid all the VAT over say 10yrs through VAT on rent, you will then de-register for VAT. Sale of the property may leave you liable to CGT but not VAT as you've taken the property out of the VAT net.

(B) yes

As you are no doubt aware, VAT on property is a very complex area. You should get proper professional advice before embarking on this venture.
 
I agree with Ham slicer and disagree with bazermc. Bazerc I think you are looking at section 4(3)(ab) and coming to the conclusion that based on this new provision introducted in the FA 2005 that you can not deregister and that you must charge VAT on the resale.
However you must read the section fully to see that the section applies to where a property was first purchased for a vatable transaction but then apportioned to a self supply.
In the case of a waiver of exemption the property was allways a nonvatable transaction where you waived an exemtion and therefore you can not apportion to a not vatable activity.

Therefore you can deregister as soon as you have repaid the vat you were orginally reclaimed. By registering you will obtain a tax advantage in that you are taxable on the net rents.
 
Just to add you should not take tax advice from your solictor. If you do register for VAT you should however get advice from a tax specialist as there will be implication for other rental properties you might have etc.
 
Arch
Section 4(3)(ab) deals with a clawback of an input credit claimed where a waiver of exemption is not in place - a lease of lease than 10 years, this section does not take the property out of the vat net a subsequent supply will still be liable to vat

It is always neccessary to go through the 4 basic questions if all answered yes than the sale is liable to vat at 13.5%. the property market is already over valued without charging an extra 13.5% on the selling price or you could sell with the expectation that you will only receive 88% of the proceeds and the balance must go to revenue. then of course stamp duty would be less as the duty is charged on the net amount so that may be attractive for the prospective buyer especially if they are ftb's

the questions are as follows:

1. Was the property developed or redeveloped in whole or in part since 31.10.1972? YES
2. Has the person disposing of the interest or creating the lease got an interest of 10 years or more? YES A FREEHOLD INTEREST
3. Is the person disposing of the interest or creating the lease doing so in the course or furtherance of any business carried on by him. This is as distinct from doing so in a private capacity. For example, selling one's residence is not a sale in the course or furtherance of business. YES A SALE OF A INVESTMENT PROPERTY NOT HIS PRIVATE RESIDENCE
4. Was the person who is disposing of the interest or creating the lease entitled to an input credit? YES THE INDIVDUAL RECLAIMED THE VAT ON THE PROPERTY

Therefore, the transaction IS chargeable to VAT. Cancelling the registration before the sale would therefore be pointless if you must charge vat on the sale
 
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