Property – VAT and SDLT

“Option to Tax”

On 1 August 1989 the UK government introduced a major change to the VAT regime forced on it by the EU.  As a result, land and buildings became subject to VAT.  However, older buildings remained exempt but owners could “waive the exemption” which is commonly known as an “option to tax”. 

Reasons for doing this was to claim back VAT on cost of running or improving the building.  Owners of commercial properties jumped to sign up for an “option to tax” as this meant VAT was chargeable on the rent they charged their tenants and the sale price of the property when they sell it, however this can cause problems.

Many businesses in the UK are fully or partially exempt from VAT which means they are restricted or barred entirely, from claiming back VAT on their purchases.  This could be a big dis-incentive to potential buyers or tenants if you own a building subject to VAT.  In the current market this is bad news but fortunately there is some good news coming because the option to tax stays in force until it is revoked,   which can only be done after 20 years, so since 1 August 2009 those who opted to tax back in 1989 have the right to cancel it.

  • You can still revoke it, even is the previous owner of your property made the option to tax, so long as it has been in force 20 years from the time they first made the election
  • Whenever you are buying a property,  always ask the seller if it is subject to VAT and if it is, ask them to revoke it if it have been in force for 20 years, or soon will be as this will save you having to raise funds to the VAT.  If your business is exempt, it can save you the entire amount of VAT on the purchase price, which you could not reclaim if it were charged.

As well as VAT and timing benefits when buying a property that is not subject to an “option to tax”,  you can also cut the amount of Stamp Duty Land Tax due, as it is charged on the purchase cost of the property including VAT, so avoiding it will actually reduce your costs.