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