A revised VAT framework is on its way for demolitionreconstruction projects, introducing greater flexibility for developers and investors.
What’s new
The Government has confirmed that, under the demolition–reconstruction VAT regime, developers may now:
- Sell to a private individual who will use the dwelling as his/her sole and principal residence; and
- Sell to an investor (individual or company) who will let the property through a recognised social housing provider,
- Sell to an investor (individual or company) who will let the property for longterm residential purposes.
The third option was not available under the previous rules. This is a major improvement for developers, broadening access to the reduced VAT rate. The new regime should apply from 1 July 2025.
Conditions
- Surface cap strengthened : only dwellings of ≤ 175 m² qualify for the 6 % rate, except where the property is let through a recognised social housing provider
- No timing constraint : the regime sets no deadline for the building permit or the start of works, smoothing the transition from the current temporary measure and a priori allowing ongoing projects to fall under the new rules.
- Other statutory requirements: the project must still involve full demolition followed by reconstruction and comply with all notification/formalities visàvis the VAT administration.
VAT scope and impact
- Reduced VAT rate (currently 6 %) should apply to the vast majority of units: developers can market almost all apartments with 6 % VAT on the full price.
- Key exceptions where 6 % VAT does not apply:
- Private buyer already owning another dwelling (fails the “sole residence” test).
- Investor for shortterm (holiday) letting, e.g. seaside flats rented for vacations.
- Wider market for developers: outside the above carveouts, projects can be sold to both owneroccupiers and longterm residential investors without losing the VAT advantage.
Structuring option – land / building split
While the land/building split—land subject to registration duty and construction to VAT—has long been a common structure in residential projects to reduce the buyer’s tax burden, a single sale taxed at 6 % VAT on the entire property seems now generally the most costeffective solution in most demolition-reconstruction projects.
Next steps for developers
- Review ongoing and pipeline projects to confirm 6 % eligibility and plan communication towards potential purchasers, particularly on VAT treatment.
- Refresh pricing models and internal margin calculations accordingly.
- Brief sales and finance teams on the new rules and the evidence required to substantiate the reduced rate.
- Monitor the publication of the final law and accompanying administrative guidance to confirm entry into force and practical requirements.
For further clarification or to assess how this reform may affect your developments, feel free to contact your usual PwC Real Estate advisor.
