Should building insurance values include VAT?

14 March 2014

We are often asked by Residential Management Companies or Property Owners if they should include VAT on their declared value rebuilding costs. So what is the general rule for applying VAT to blocks of flats.

If the property owners are not VAT registered and despite residential buildings being zero rated during construction we believe the answer should be ‘YES’ and applied to the whole rebuilding costs and not just demolition and fees.

What helped persuade us and demonstrates the importance of including VAT on a declared value was highlighted recently by one of our insurers, following a recent claim at a property they provide insurance for.

A block of 96 flats were valued and insured for the full rebuilding cost, but the residents decided not to include the VAT in the total - to reduce their premium spend. Subsequently there was a large fire at the property and the building needed to be completely demolished and rebuilt.

Unfortunately due to changes in legislation for private dwellings, when planning permission for the new block was submitted the clients were only granted permission to rebuild 90 flats on the site. This left a choice to be made:

1. Rebuild the property as 90 flats and 6 people lose their homes or 2. Or to reinstate the property instead of demolishing.

The only option here was to reinstate. As the client had opted not to include VAT on the rebuild value, the property was more than 20% underinsured and the rebuild value was woefully inadequate to reinstate the block. 

VAT is only waived on a complete rebuild of residential properties and the property owners had to fund the additional 20% shortfall personally - causing a great amount of distress and financial loss.

It is clear from the enquiries we receive that the issue of adding VAT to rebuilding costs is a decision that causes property managers, owners and investors some confusion and uncertainty with many unwittingly opting not to include the additional 20% tax as they believe they are protected by the VAT status of new build residential properties and would prefer to see a saving in the overall premium.

Our advice is always to include the VAT, ensuring the property is insured for the correct amount and should the worst occur……the property owners are properly covered.

For further information, please contact Jo Squires, Underwriting Manager, Real Estate on +44 (0)12 0244 6417

contact Jo Squires
Underwriting Manager