You’re developing a building into flats plus commercial accommodation. The trouble is the prospective buyers for each part have different VAT statuses. How can you structure the sale to minimise the VAT impact for everyone?

VAT stamp duty trap

Our subscriber’s business is developing and letting commercial and residential properties. He’s currently eyeing the purchase of a high street property. The ground floor is rented to a charity shop and there’s 15 years to run on the lease. The first floor is for commercial use but currently vacant. Our subscriber wants to convert it to residential. The trouble is the seller is nervous about VAT and, because he’s opted to tax the property, he wants to protect his position by charging VAT on the sale. This would result in a double tax hit for our subscriber.

Trap. Stamp duty land tax (SDLT) is payable on the price including VAT. If the vendor charges VAT it will also hike the SDLT which is an irrecoverable cost for our subscriber.

Trap. Our subscriber’s business is partially exempt and the part of the property when converted to residential is also wholly exempt. This would mean VAT paid on the corresponding part of the purchase price would be irrecoverable.

The charity factor

Before looking at how our subscriber should approach the seller about VAT, we can put his mind at rest about what effect the lease to the charity has on the situation. The answer is none at all. The current property owner should be charging VAT and after the purchase our subscriber should continue to do so.

Divide the sale price

Our subscriber should approach the seller and explain why he doesn’t need to charge VAT on the sale price.

Ground floor. The sale of the freehold with lease of the ground floor counts as a transfer of a going concern (TOGC), namely a property rental business. As such, its sale is a supply outside the scope of VAT and the vendor is not entitled to charge it.

First floor. Although the property is currently for commercial use, although vacant, our subscriber intends to convert it to residential use. This means he can disapply the seller’s option to tax.

Tip. Our subscriber should complete Form 1614D and pass it to the seller as soon as possible so the price can be fixed without VAT. This should be done before exchange of contracts otherwise the seller is not obliged to disapply the option.

Valuing the property

Even though the use of Form 1614D and the TOGC rules mean VAT doesn’t need to be added to the sale price, our subscriber and the seller should agree a price for each part of the property. This is important for our subscriber because it will affect the VAT he can recover on legal and other costs incurred in buying the property.

Tip. To work out how much of the VAT paid on purchase costs our subscriber can recover he must apply the normal partial exemption rules.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit or call 01233 653500.