Tool use has been shown to modulate the multisensory representation of the area surrounding our body known as peripersonal space (PPS). Yet, it remains unclear whether such effects extend to tool use in virtual reality (VR), and whether age may influence this modulation of PPS in VR. We investigated these questions in younger adults (YAs; 19–29 years) and older adults (OAs; 65–84 years). Participants completed a tool-use task in VR while viewing a virtual avatar from a first-person perspective. Tool-use effects on PPS were assessed using a visuo-tactile task before and after tool use, and participants rated their sense of ownership over the avatar at both time points. Results in YAs suggest a location-specific modulation of PPS after tool use. In contrast, OAs did not show a location-specific modulation but exhibited results suggesting a general enhancement of PPS within the VR environment. Interestingly, while both groups showed increased avatar ownership following tool use, only OAs demonstrated an association between this increase in ownership and increased overall multisensory facilitation in VR. These findings suggest that PPS remains responsive to VR environments in older age, but that the mechanisms underlying PPS modulation after tool use in VR differ with age.