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VAT on commercial property sales – How it impacts you and how to save
If you don't plan, VAT on commercial property sales can add unexpected costs for both buyers and sellers. Knowing when VAT applies, how it affects Stamp Duty Land Tax (SDLT), and what reliefs are available can make a significant difference in any unexpected commercial property deal. This guide will outline the most essential rules, common scenarios, and valuable ways to minimize Tax liabilities.
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What is VAT on commercial property
- VAT on commercial property is often misunderstood. Not every property sale is subject to VAT. The standard rate of 20 percent may apply in some instances, but there are clear exemptions and reliefs available. Understanding these rules is essential before signing any deal, as the Tax treatment can significantly add or remove costs.
- Commercial buildings are treated differently from residential property. While residential sales are exempt, commercial transactions can be subject to VAT unless specific conditions are met. The most common situations involve new commercial buildings, opted-to-tax properties, and transactions that qualify as a Transfer of a Going Concern (TOGC).
When does VAT apply to selling commercial property
New commercial buildings
The sale of a newly constructed commercial building, usually within three years of completion, is subject to VAT. This applies even if the buyer intends to use it for investment or rental.
Opting to Tax
An owner can opt to Tax a property, meaning they decide to charge VAT on rent or sale. Once made, this choice typically remains in effect for at least 20 years. Buyers need to factor this into their budgets, as opting for Tax can make a property more expensive.
Transfer of a Going Concern (TOGC)
How VAT on property sales affects buyers & sellers
- For sellers, charging VAT can impact demand. Some buyers may step back if they need to pay 20 percent extra on top of the sale price. For buyers, paying VAT upfront increases cash flow pressure. However, if the buyer is VAT registered, the amount can often be reclaimed through their VAT return.
- The challenge comes with Stamp Duty Land Tax (SDLT). SDLT is calculated on the purchase price, including VAT. This means that if VAT is added, SDLT also increases. For example, a £1 million property with VAT at 20 percent adds £200,000. SDLT is then calculated on £1.2 million, not £1 million. That extra Tax is unrecoverable.
Reducing SDLT on commercial property transactions
Use TOGC relief
Plan the Opt to Tax Decision
Professional structuring
Common scenarios in commercial property VAT
Selling a rented office block
If the property is entirely let, selling it as a going concern can avoid VAT. The buyer must be VAT registered and continue the rental business.
Selling a vacant warehouse
If vacant and not opted to Tax, no VAT is due. If opting for Tax, VAT is payable unless TOGC applies.
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VAT on business premises vs residential property
Key steps to save on VAT and SDLT in commercial property
- Check property status – new, old, rented, vacant.
- Confirm VAT registration for both seller and buyer.
- Access the Tax history to determine if VAT is required.
- Consider TOGC if selling with tenants or a running business.
- Document agreements properly to avoid HMRC challenges.
- Plan SDLT exposure by structuring the deal efficiently.
Why VAT software helps with property transactions
- Since sales of commercial real estate typically involve substantial sums, errors with VAT can be highly expensive. By maintaining accurate records, submitting returns on time, and adhering to HMRC regulations, using dependable VAT software helps businesses maintain compliance.
- Automation reduces errors and keeps everything organized for future inspections, making it easier for companies with multiple properties to manage their assets effectively. Learn more about our VAT return submission tool
Concluding remarks
- VAT on commercial real estate can be avoided with careful planning. Both buyers and sellers should verify whether VAT is applicable, see if TOGC relief is available, and consider how SDLT will be calculated before finalizing a transaction.
- These actions streamline the procedure and help prevent additional Tax expenses. The right strategy can avoid double taxation and improve cash flow. Start planning smarter with Swift VAT Pro’s solutions.
Frequently Asked Questions:
Your Questions – Answered ,We’re here to help you with anything VAT-related.
1. Is VAT always payable when buying a commercial property in the UK?
No, VAT is not always payable on commercial property purchases in the UK. The liability depends on several factors, such as the property’s age, its intended use, and whether the seller has opted to Tax it. Newly built commercial properties (less than three years old) are usually subject to VAT at the standard 20 percent rate.
However, older properties may not be subject to VAT unless the seller has opted to Tax them, which allows VAT to be charged on sales or rentals. If the transaction qualifies as a Transfer of a Going Concern (TOGC), VAT is typically not charged, provided the buyer is VAT-registered and continues to operate the business.
Understanding these differences is critical because VAT treatment also affects Stamp Duty Land Tax (SDLT). Since SDLT is calculated on the total price, including VAT, structuring the deal correctly can reduce costs and prevent unnecessary Tax liabilities.
2. What is the “option to tax” and how does it affect commercial property sales?
The “option to Tax” is a decision made by a property owner to charge VAT on the sale or rental of a commercial property. Once applied, the election generally lasts for at least 20 years. This option can make a property less attractive to buyers because it adds 20 percent VAT to the purchase price.
However, for buyers who are VAT-registered, the VAT can often be reclaimed through their VAT return, reducing the financial burden. The complication is that Stamp Duty Land Tax (SDLT) is still calculated on the gross amount, including VAT, which increases the final acquisition cost.
Choosing whether to opt for Tax requires careful consideration, particularly for investors who plan to sell the property in the future. Professional advice should be taken before making the decision, as reversing an option to Tax is not straightforward and can impact long-term financial outcomes.
3. How does a Transfer of a Going Concern (TOGC) help save VAT on property transactions?
A Transfer of a Going Concern (TOGC) is a special relief that can be applied when a commercial property is sold along with its existing business activities, such as a rental income stream from tenants. In such cases, VAT is not charged on the sale price, resulting in significant savings for the buyer.
For TOGC to apply, both the buyer and seller must be VAT-registered, and the buyer must continue operating the same type of business without interruption.
This relief not only prevents VAT from being added to the purchase price but also reduces the Stamp Duty Land Tax (SDLT) bill, since SDLT is calculated on the purchase price plus VAT. By removing the VAT element, the total taxable amount drops, which can save buyers large sums. However, the rules are strict, and poor structuring could lead to HMRC rejecting the TOGC claim.
4. What is the impact of VAT on Stamp Duty Land Tax (SDLT) for commercial property buyers?
VAT can significantly increase the Stamp Duty Land Tax (SDLT) liability when purchasing a commercial property. SDLT is calculated based on the total purchase price, and if VAT is charged, it is included in the calculation.
For example, if a property is bought for £1 million and VAT of £200,000 is applied, SDLT is assessed on £1.2 million instead of £1 million. This additional SDLT cost is not recoverable, even if the buyer is VAT-registered and later reclaims the VAT on their return. Therefore, VAT can indirectly increase the price of a transaction by raising SDLT.
Buyers often attempt to structure deals as a Transfer of a Going Concern (TOGC), which eliminates VAT from the transaction and reduces SDLT. Understanding the interaction between VAT and SDLT is critical when budgeting for commercial property purchases. Professional advice can help minimize unnecessary costs.
5. How can businesses use VAT software to manage property-related transactions?
VAT on commercial property sales can be complicated, especially when dealing with multiple transactions, tenants, and reliefs such as TOGC. Utilizing reliable VAT software enables businesses to manage these complexities effectively. The software automates VAT calculations, ensuring that charges and exemptions are applied correctly.
It also helps maintain compliance with HMRC by generating accurate digital VAT returns and keeping audit-ready records. For companies managing multiple properties, VAT software simplifies the process of tracking opted-to-tax buildings, reclaiming input VAT, and avoiding late filing penalties. Automation reduces human errors, which can be costly in large real estate deals.
Additionally, VAT software integrates with accounting systems, giving property investors a clear view of cash flow and Tax liabilities. By utilizing these tools, businesses can ensure they are not overpaying VAT, remain compliant with regulations, and streamline property transactions, ultimately saving both time and money.
