The importance of considering VAT in commercial property transactions

If you are thinking of purchasing a commercial property, or taking a lease of a commercial property and you have agreed a purchase price with the seller or the amount of annual rent with the landlord, always check whether the purchase price/annual rent will be subject to VAT or not. 

VAT is automatically payable where a buyer purchases a freehold commercial property less than three years old. However, VAT can still be payable in any other commercial property purchase or upon the entering into of a lease if the seller/landlord has ‘opted to tax’ the property at HM Revenue & Customs. If this is the case, the seller/landlord should be able to produce a letter to this effect received by HMRC confirming that the seller/landlord has successfully opted to tax the property. If this is the case, then VAT will be payable on the purchase price or the amount of annual rent at the standard rate. This could result in a buyer/tenant incurring greater upfront costs than originally anticipated (albeit the buyer/tenant should then be able to recover the VAT from HMRC when making their own VAT return).

Furthermore, where a lease is being entered into, it is also important to be aware that even if at the time of the grant of the lease no VAT is payable on the annual rent because the landlord has not opted to tax the property at that time, most leases will reserve a right to the landlord to charge VAT on the annual rent at some point in future during the term of the lease if the landlord ever opts to tax the property. The same is true of any rent deposit paid to the landlord in connection with the lease; a landlord can also oblige a tenant to ‘top up’ the deposit in the amount of VAT required if the landlord opts to tax the property during the term of the lease.

It is also important to be aware that if VAT is chargeable on a transaction, Stamp Duty Land Tax (SDLT) needs to be paid not only on the purchase price, but also the amount of VAT payable. This could considerably increase the amount of SDLT payable. 

If however, a buyer purchases a commercial investment property which is subject to a rental business (ie. a buyer purchases the landlord’s freehold interest and there is a tenant in occupation of the property running a business) it may be possible for the buyer to obtain relief from having to pay VAT. In order to qualify for relief, both the seller and the buyer each need to submit an option to tax the property at HMRC. Any buyer would be advised to instruct their accountant to deal with this on their behalf.

The situation is different however with residential properties, where no VAT is payable upon the purchase of the same.