The end of the five-year rule

Under the previous framework, the VAT treatment of a building depended on criteria relating to the five-year period following completion and whether it had been actually used by an unrelated person for at least 24 months.

From 1 September 2026, the passage of five years from completion no longer provides, by itself, a basis for treating a building’s sale as VAT-exempt. The relevant test is whether the supply takes place before first occupation, as defined in the legislation.

An older building that has remained unused may therefore still be subject to VAT when sold, subject to the circumstances of the transaction and any applicable exemptions.

First occupation and systematic use

For these purposes, “first occupation” means the first use of a building after its delivery or construction, including owner-occupation, own use, letting or other systematic use.

“First use” requires systematic use or exploitation of the building for a period of at least 18 months. A brief period of occupation or letting does not, by itself, satisfy this requirement.

The property’s actual history of use is therefore central to the assessment. A building completed several years ago but never occupied should not automatically be regarded as VAT-exempt simply because more than five years have passed since completion.

The seller’s status remains important

The changes do not mean that every property sale by a private owner is subject to VAT. It remains necessary to determine whether the seller is acting as a taxable person in the course of business and whether the transaction falls within the scope of VAT.

A disposal of a genuinely private asset may be outside the scope of VAT. This is distinct from a transaction that falls within the VAT system but qualifies for an exemption. Other statutory exemptions must also be considered where relevant.

What this means for developers and owners

Developers and owners considering a sale should review the VAT position of buildings that are:

• completed but still vacant
• occupied or used by the owner
• let to tenants
• offered for sale

Records of completion, delivery, occupation and letting should be retained. Where systematic use is relied upon, its nature and duration should be supported by appropriate evidence.

In particular, developers and owners should establish and retain evidence of:

• the date of completion;
• the date of delivery;
• the date of first occupation or first use;
• the nature of the property’s use;
• periods of rental or owner occupation;
• whether the property has been systematically used for at least 18 months; and
• the VAT treatment applicable to any proposed sale.

This information may be important when determining the correct VAT treatment of a future transaction.

What buyers should check

Purchasers should investigate the VAT position before signing a sale agreement or otherwise committing to the transaction. Relevant checks include:

• the seller’s status and the capacity in which the seller is acting;
• when the building was completed and delivered;
• when and how it was first used;
• whether at least 18 months of systematic use can be demonstrated;
• the evidence supporting that use, including tenancy agreements and utility consumption records;
• whether any statutory exemption applies; and
• whether the agreed price includes VAT and who bears responsibility for any subsequent VAT assessment.

Separate consideration for the 5% VAT rate

The amendments effective from 1 September 2026 should also be distinguished from the separate rules governing the reduced 5% VAT rate for qualifying primary residences.

The fact that a property is subject to VAT does not automatically mean that the purchaser is entitled to pay VAT at 5%. Eligibility for the reduced rate for a primary residence is subject to separate statutory conditions.

Similarly, the amended rules concerning the application of the 5% rate to qualifying renovation and repair services for private residences involve their own requirements, including relevant conditions concerning the age of the residence and its systematic use.

Accordingly, each transaction should be analysed separately rather than assuming that the 5% rate automatically applies.

Practical due-diligence checklist

Before purchasing or selling a property, the parties should consider obtaining documentation confirming:

1. Completion date
2. Delivery date
3. First occupation date
4. First use date
5. Nature of the property’s use
6. Rental history, where applicable
7. Periods of vacancy
8. Evidence of systematic use
9. Whether the 18-month systematic-use period has been satisfied
10. Applicable VAT treatment
11. Applicable VAT rate
12. Eligibility for any reduced VAT rate
13. Relevant VAT invoices or previous transaction documents
14. Appropriate contractual provisions dealing with VAT liability

Conclusion

From 1 September 2026, the previous five-year and actual-use criteria have been replaced by a test centred on first occupation, defined by reference to at least 18 months of systematic use.

Owners, developers and purchasers should assess each transaction by reference to the building’s documented history, the seller’s status and the applicable legal provisions. The property’s age alone is no longer sufficient to determine its VAT treatment.