VAT on Property UK 2026/27 -- Option to Tax, Exempt Supplies and Commercial Buildings

The default: VAT exemption for land and buildings

Under Schedule 9 of the Value Added Tax Act 1994, the sale and leasing of land and buildings is generally exempt from VAT. This means:

• No VAT is charged on the sale price or rent
• Input VAT on costs related to that property (construction, repairs, professional fees) is generally not recoverable
• Transactions do not count toward the VAT registration threshold for this purpose

For most residential landlords and property investors, exemption is simply the default position and requires no action. But for commercial property developers, commercial landlords and investors in commercial property, exemption creates a significant cash flow and cost problem: input VAT on development costs is a real expense that cannot be recovered.

Exceptions: supplies that are always standard-rated

Certain property supplies are always standard-rated at 20% regardless of any election -- the property owner has no choice:

• First grant of a major interest in a new commercial building completed within the last 3 years. "Major interest" means freehold sale or a lease over 21 years.
• Construction services for a new commercial building.
• Civil engineering services (roads, drainage, foundations).
• Short-term accommodation -- hotels, B&Bs, serviced apartments. The exemption for residential letting does not apply to holiday lettings or lettings where the occupancy is less than 28 days.
• Parking facilities provided separately from other exempt land supplies.
• Sports facilities, gaming facilities, and certain other specified uses.

Residential property: zero-rating and reduced rate

The first sale of a new residential dwelling by the person who constructs it is zero-rated. Zero-rating means no VAT is charged on the sale but the developer can recover all input VAT on construction costs -- the opposite of exemption. This is the most commercially attractive VAT position: full input VAT recovery at zero cost to the buyer.

Once a residential property has been sold (the first grant), subsequent sales are exempt. A second-hand house sold by its owner generates no VAT and no input VAT recovery -- as expected for a typical domestic property transaction.

The 5% reduced rate applies to certain conversion services:

• Converting a non-residential building (such as a barn or church) into a dwelling or dwellings
• Converting a house into multiple flats (or multiple flats back into a house)
• Construction services on a residential property that has been empty for 2 or more years

The Option to Tax (OTT)

The Option to Tax is the mechanism by which a property owner elects to make their otherwise-exempt commercial land or building supplies standard-rated at 20%. Once opted, the owner charges 20% VAT on rent and on any sale of the property, and can recover input VAT on related costs.

The OTT process:

• The option is made on a property-by-property basis (or on a "whole building" basis). It is personal to the entity making it -- a company that opts does not bind its directors personally or other group companies automatically.
• You notify HMRC by submitting form VAT1614A within 30 days of the date you made the option (usually the date you first charged VAT or the date of a board resolution).
• The option runs for 20 years and cannot be revoked (with very narrow exceptions).
• There is a 6-month cooling-off period after granting the option if no taxable supplies have been made.

The OTT cannot be applied to a building intended to be used wholly for residential purposes (including care homes, student accommodation and hospices), as HMRC does not permit opting on those properties. Notification to HMRC is not the option itself -- the option is made by the property owner's decision; the notification is the formal record. However, failure to notify in time creates compliance risk.

Worked example: developer, Option to Tax

Capital Goods Scheme (CGS)

The CGS is a mechanism that requires businesses to monitor and potentially adjust input VAT claimed on large capital items if the proportion of taxable (vs exempt) use changes over time. For land and buildings, the CGS applies when:

• The property costs £250,000 or more (excluding VAT)
• The owner is VAT-registered
• Input VAT was claimed on acquisition or construction

The CGS adjustment period for land and buildings is 10 intervals (broadly 10 years). In each interval, if the proportion of taxable use of the property changes materially from the year in which input VAT was originally claimed, an adjustment must be made -- either recovering more or paying back some of the original input VAT. This creates a long-term tail on the VAT position of any opted commercial property that cost over £250,000.

Transfer of Going Concern (TOGC)

When a commercial property rental business is sold (e.g. a landlord selling a tenanted office building), it may qualify as a Transfer of Going Concern (TOGC), which is treated as outside the scope of VAT. This means no 20% VAT is charged on the sale price -- a major benefit for both parties since no VAT needs to be funded or financed on the transaction.

For a property TOGC to apply:

• The seller must be making taxable supplies of the property (usually because it is opted to tax).
• The buyer must opt to tax the property before the TOGC takes place (before completion).
• The buyer must notify HMRC of their option before completion.
• The buyer must be VAT-registered (or register at the same time).
• The business being transferred must be capable of separate operation.

If the buyer fails to opt to tax in time, the TOGC conditions are not met and the seller must charge 20% VAT on the full sale price. For a £5m property that is an additional £1m of VAT -- highlighting why TOGC compliance needs careful pre-transaction planning.

Partial exemption for mixed portfolios

Landlords or investors with a mix of opted and non-opted properties -- or a mix of commercial (opted) and residential (always exempt) -- will be partially exempt. Input VAT on costs that relate directly to taxable (opted) properties is fully recoverable. Input VAT on costs relating directly to exempt properties is not recoverable. "Residual" input VAT (overheads, group costs) must be apportioned.

The standard partial exemption method apportions residual input VAT by the ratio of taxable supplies to total supplies (taxable + exempt). If this gives a distorted result, HMRC can agree a special method -- often based on floor area, rental income or number of properties. Mixed-portfolio landlords should review their partial exemption position annually and confirm whether the de minimis limits (currently exempt input VAT below £625/month on average and below 50% of total input VAT) allow full recovery anyway.