VAT Option to Tax on Commercial Property: When and Why to OTT in 2026

The VAT treatment of land and property in the UK is one of the most complex areas of VAT law. By default, the supply of an interest in land — whether a freehold sale, a lease, or a licence — is exempt from VAT. Exemption sounds attractive, but it creates a hidden cost: if a supply is exempt, the supplier cannot recover VAT on related costs, such as refurbishment, professional fees, or management charges.

The Option to Tax (OTT) solves this problem for commercial property by allowing the supplier to elect to charge VAT at 20%, thereby recovering the VAT incurred on costs. This guide explains when and why to opt, the procedural requirements, the key restrictions, and the practical pitfalls to avoid in 2026.

Why Does VAT Exemption on Property Create a Problem?

When a supply is exempt from VAT, the supplier cannot recover input VAT — the VAT it has paid on goods and services used to make that supply. For a commercial landlord, this means:

• VAT on a £500,000 refurbishment (£100,000 at 20%) is a real cost, not reclaimable.
• VAT on solicitor and surveyor fees is irrecoverable.
• VAT on ongoing maintenance and management costs cannot be offset.

For a landlord with significant capital expenditure on a building, the irrecoverable VAT can be a very substantial cost. The OTT allows the landlord to recover this VAT — but at the cost of charging VAT on the rent or sale price to tenants or buyers.

Who Benefits From Opting to Tax?

OTT works well when:

• Tenants or buyers are VAT-registered businesses that can recover the VAT charged to them. A solicitor's firm, an IT company, or a retailer with fully taxable turnover can simply recover the VAT on their rent as input tax, making the OTT cost-neutral for them.
• Significant refurbishment or development costs are anticipated. The VAT on major works becomes reclaimable.
• A property is being sold and the seller has incurred VAT on costs. Without an OTT, exempt sale means irrecoverable VAT.

OTT does not work well when:

• Tenants or buyers are VAT-exempt businesses (banks, insurers, medical practices, charities) that cannot recover VAT. Charging them 20% VAT on rent is a real additional cost that may deter them or require rent adjustment.
• The building is used for residential purposes — the OTT cannot apply.
• The ongoing costs are modest and there is no significant VAT on expenditure to recover.

The Mechanics of the Option to Tax

Step 1: Making the Decision

The OTT takes effect from the date the decision is made. This is a formal decision, not merely an intention. You should document the decision with a board minute, a written note, or an email confirming the date and the property to which it applies.

Step 2: Notifying HMRC

You must notify HMRC of the OTT within 30 days of making the decision. This is done by completing HMRC form VAT1614A ("Notification of an option to tax land and/or buildings") and submitting it to HMRC's Option to Tax National Unit. Submission can be made by post or email.

HMRC will acknowledge the notification, and you should retain both the submission and the acknowledgement as evidence. Late notification does not invalidate the OTT, but it can complicate matters if there is any dispute about the effective date.

Step 3: Charging VAT

Once the OTT is in place, all supplies relating to that property — rent, service charges, sales of the freehold — must be charged with VAT at 20%. This applies from the effective date of the option, not just from the date of notification.

New leases must include a VAT clause. Existing leases may need to be varied if they are silent on VAT. Getting the contractual drafting right is essential to avoid disputes with tenants over whether VAT is included in the agreed rent.

Irrevocability and Revocation

The 20-Year Rule

The OTT is effectively permanent for 20 years from the date it took effect. This is the single most important thing to understand about an OTT. Opting to tax is not a decision to take lightly or reverse — it binds all future owners of the property unless the option is later revoked.

The Six-Month Cooling-Off Window

Within the first six months of making an OTT, you can revoke it — but only if:

• You have not yet made any VAT-able supplies in relation to the property under the option; and
• You have not claimed any input VAT on costs relating to the opted property.

In practice, if you have already charged VAT on any rent or recovered any input VAT, the cooling-off revocation is not available. This makes the six-month window useful only in limited circumstances (for example, where the property transaction falls through before completion).

Revocation After 20 Years

After 20 years, you can apply to HMRC to revoke the OTT if:

• You have not made any VAT-able supplies in the previous 10 years; or
• The Capital Goods Scheme adjustment period for the property has ended.

Revocation after 20 years is uncommon in practice and requires a formal application to HMRC.

Restrictions and Anti-Avoidance

Residential Property

The OTT cannot apply to:

• Residential buildings (houses, flats, student accommodation).
• Buildings intended to be converted to residential use before or during the supply.
• Buildings used solely for relevant residential purposes (care homes, student halls) or relevant charitable purposes.

If a commercial building is later converted to residential use, the OTT is automatically disapplied from the point of conversion.

The Anti-Avoidance Rule (Section 89A VATA)

HMRC's most significant anti-avoidance rule for OTT disapplies the option where:

• The building will be used by a connected person for exempt or non-business purposes; and
• That connected person would not be able to recover the VAT charged.

"Connected" for these purposes broadly follows the Income Tax Act 2007 definition — spouses, relatives, business associates, and controlled companies. The effect is that an opted property transaction between connected parties where the buyer/tenant cannot recover VAT loses its OTT benefit: the supplies revert to exempt.

Transfer of Going Concern (TOGC)

When an opted commercial property is sold as a going concern — typically where there are existing tenants — the sale may qualify as a Transfer of Going Concern (TOGC). A TOGC is outside the scope of VAT entirely, meaning no VAT is charged on the sale even though the property is opted. This is significant for buyers who cannot recover VAT fully.

For TOGC to apply:

• The buyer must be VAT-registered (or become VAT-registered as a result of the transfer).
• The buyer must themselves opt to tax the property before the completion date.
• The assets being transferred must form a business capable of operating independently.

Failure to satisfy TOGC conditions — particularly the buyer's OTT — means VAT at 20% is chargeable on the full sale price, which for a £1 million+ property creates a very significant cash flow issue.

Practical Checklist for Property Owners

Before opting to tax a commercial property, work through these questions:

1. Who are the likely tenants or buyers? If they are VAT-registered with fully taxable turnover, OTT is likely beneficial. If they are exempt businesses, OTT will impose an irrecoverable cost.
2. What are the anticipated costs? Quantify the VAT on refurbishment, professional fees, and ongoing management to assess the benefit.
3. Is there a connected party who cannot recover VAT? If so, the anti-avoidance rule may disapply the OTT in any transaction with that party.
4. What is the long-term plan for the property? If residential conversion is likely, factor in when the OTT will be disapplied.
5. Does the Capital Goods Scheme apply? For properties with VAT recovery on costs exceeding £250,000, the Capital Goods Scheme requires adjustment over 10 years if the use of the property changes.

The Bottom Line

The Option to Tax is a powerful VAT planning tool that allows commercial property owners to recover input VAT on costs by making their supplies taxable at 20%. However, it is irrevocable for 20 years, applies building-by-building, cannot cover residential property, and is subject to anti-avoidance rules that can disapply it in transactions with connected VAT-exempt parties. Always take specialist VAT advice before opting, ensure HMRC is notified on form VAT1614A within 30 days, and build the OTT status into all lease and sale contracts from day one to avoid costly disputes.