The search for community combined with the increasing costs of buying property in London and the South East of the UK have resulted in the growth of the co-living sector. Young, mobile workers used to the higher quality of student accommodation schemes are now seeking a similar product for their post-student life.

Co-living developments have become increasingly common in the UK, with a number of new entrants into the market in recent times, as well as a number of other businesses looking to move into this area. This follows a recent trend for a greater number and range of co-working developments in London.

Co-living developments typically involve individual apartments for residents, generally with private bathroom facilities and, possibly, their own kitchen facilities. Whilst smaller than traditional apartment accommodation, this is often compensated for with a wide variety of communal spaces. These communal spaces may include kitchens, and frequently include shared spaces for working and mixing socially with other people, a gym and other fitness facilities, and a cinema room.

There are a number of potential issues that need to be considered when undertaking a co-living development, including issues in relation to real estate, planning law and tax. This is commonly referred to as “smoothing the peaks” in demand. This is not a market aimed at base generation.

Real estate

Much is governed by the tax treatment, but operators are likely to want to choose between a standard assured shorthold tenancy (AST) or a more bespoke permit agreement, more akin to the permission one gives a hotel resident to use and occupy a hotel room and other facilities. The most common form of letting agreement for tenancies in the UK is the AST. This has been the default agreement since the late 1980s and applies automatically to tenancies between private landlords and individuals where the property is the tenant’s main accommodation.

Unless the accommodation is being provided as part of the tenant’s job, or there is a social/care element to the letting, then the operator will be under an obligation to check that the tenant can legally rent the property. This will include checking their immigration status.

The receipt of a deposit as part of the tenancy agreement must be lodged with a tenancy deposit scheme. This government-backed scheme ensures tenants will get their deposit back if they meet the terms of the tenancy agreement, don’t damage the property and pay the rent and bills.

Most co-living schemes seek maximum flexibility. Although ASTs can be for as short a period as one day, possession orders to remove tenants who fail to leave are only effective after six months.

ASTs are still usually used for the traditional house sharing scenario where individuals rent rooms within a larger building and then share facilities (such as bathrooms and kitchens). The majority of new co-living brands have also stuck with the AST model so that they can take a deposit.

Given the constraints to flexible tenancies incumbent in ASTs, numerous operators have looked to explore other options. In the elderly care sector— where staff have constant access to administer health services and patients can be moved from room to room—care homes often use permit agreements, so this is one possible avenue to explore and may be an option where the bedroom space is ancillary to the amenity being provided. The hotel model is also something to consider, but as mentioned below, this has its own tax issues.

Planning

Planning permission may be required to change the use of a building. In the current London development and planning climate, that could mean from B1 (offices) to C1 (hotel). The length of stay can impact upon the use designated for the co-living scheme. While this is a factor, it is not the only one to consider. The extent to which the individual units are self-contained and capable of occupation as standalone units is also a significant consideration. Likewise, if people are in fact occupying units as their primary residence for long periods, there is still a risk that they are occupying them as dwellings with the resultant need to have a residential use class. If the use is residential rather than hotel, the local planning authority may expect it to include an element of affordable housing, which most co-living developers and operators are keen to avoid.

Tax

For the purposes of a number of taxes, it is necessary to determine whether a building is “residential” or “commercial”. This may present a difficult question in the context of coliving developments.

It is important to determine the correct VAT treatment of the lettings/services that will be provided to those residing at the property. This will depend, amongst other things, on the precise design of the property, the services that will be provided and how the property will be marketed to potential residents.

The basic position in the UK is that the letting of dwellings (eg flats on six- or twelvemonth tenancies) is exempt from VAT, whilst hotel-type accommodation is subject to VAT (at 20 percent or lower, depending on length of stay). It is often not clear whether co-living developments will be treated like traditional flats or as hoteltype accommodation and each development needs to be considered on a case-by-case basis. The planning use class is not necessarily determinative.

If VAT must be charged, then it should be possible to obtain a credit for any VAT that is incurred in connection with providing the services or purchasing/ constructing the property. If, however, VAT is not chargeable, then ongoing VAT recovery may not be possible, although VAT recovery may be possible for any initial VAT incurred (eg on purchase/construction costs), if properly structured.

The question of whether or not VAT is chargeable will, of course, have a major pricing implication. If most of the occupiers are private individuals, they will not be able to recover any VAT they are charged on rent and service charges. On the assumption that the market will only support a particular level of rent (irrespective of whether or not VAT is chargeable to the occupiers) then any net VAT cost will effectively be borne by the owner, that is, VAT costs will directly reduce the after-tax return achievable by the owner.

There are other tax implications that need to be considered. In particular, the corporate income tax treatment of residential accommodation will differ from the corporate income tax treatment of hoteltype accommodation; this should be considered in more detail before undertaking any co-living development.

It is also worth noting that residential accommodation may be treated differently to commercial properties for real estate transfer tax purposes. Whether a coliving development is treated as commercial or residential depends on the particular circumstances of the transaction and the precise design of the property, but tax rates of up to 15 percent can apply to the purchase of residential property. By contrast, the maximum rate of tax for commercial properties is just 5 percent in England.

However, purchasing six or more “dwellings” as part of the same transaction can give rise to lower commercial tax rates (of up to 5 percent in England, 4.5 percent in Scotland and 6 percent in Wales), and other reliefs can apply on the purchase of multiple dwellings.

Each co-living development would need to be considered on a case-by-case basis to determine the appropriate treatment.

Conclusion

Lawyers are often taken to task for responding to a client’s question with “It depends”! However, in the case of coliving, there are many different ways in which an operator can run their business which can have a significant impact upon the planning and tax treatment. By definition, co-living involves a hybrid of numerous use classes and classification for tax purposes. Operators need to consider very carefully their business model and the likely impact of legal, planning and tax rules.

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