VAT on a property purchase runs on one default and a stack of exceptions: property transactions are exempt from VAT by default — but new commercial buildings are standard-rated, sellers can choose to charge VAT by opting to tax, new homes are zero-rated, and the wrong assumption at heads of terms adds 20% to a price or strands VAT that was never recoverable. Because the sums are the largest most businesses ever spend, this is the area where a one-line VAT clause is worth more than almost any other drafting in the deal.
Here is the map, buyer's-eye view.
Commercial property: exempt, unless
Buying an office, warehouse or shop is exempt from VAT — no VAT on the price — with two big exceptions:
- New buildings. The freehold sale of a commercial building less than three years old is compulsorily standard-rated at 20%. Developers' sales of fresh stock always carry VAT;
- The seller has opted to tax. The option to tax lets an owner convert their exempt supplies of a property into taxable ones — charging 20% on rent and sale, in exchange for recovering VAT on their own costs (refurbishments, professional fees). Landlords who spent money on a building have usually opted, which is why so much secondary commercial stock comes with VAT attached.
Key mechanics of the option: it belongs to the person, not the building — the seller's option does not bind you, and if you buy an opted property and want to recover the VAT charged, you generally opt too; it is notified to HMRC within 30 days of the decision; and it is close to permanent — a six-month cooling-off in narrow circumstances, otherwise revocable only after twenty years. Opting is a portfolio decision with two decades of consequences, not a checkbox.
Buying an opted property: the cash-flow and the escape hatch
Where VAT is charged, a fully taxable buyer recovers it — but must fund it between completion and the VAT return, and pays SDLT on the VAT-inclusive price: on a £2 million purchase, the £400,000 of VAT drags roughly £20,000 of extra, unrecoverable SDLT with it. Exempt and partially exempt buyers — financial services, healthcare, education, charities using buildings for non-business purposes — may recover little or none of the VAT, turning a 20% charge into a genuine 20% cost. Their negotiations should start with whether the deal can avoid VAT at all.
Two escape hatches matter. Buying a tenanted building as a going-concern rental business can be a TOGC — outside the scope of VAT entirely, provided the buyer opts to tax and notifies HMRC before the relevant date, with the SDLT saving as a bonus; the choreography is unforgiving and covered in our TOGC guide. And a buyer converting a commercial building to dwellings can serve certificate VAT1614D, disapplying the seller's option so no VAT is charged — the standard move for residential developers acquiring offices. Anti-avoidance rules also disapply options in certain structures involving exempt occupiers, which is precisely the trap that catches connected-party and sale-and-leaseback arrangements designed on a napkin.
Residential property: a different rulebook
Homes work differently. Sales of existing dwellings are exempt — no VAT on ordinary house purchases, ever. The first sale of a new dwelling by its developer is zero-rated: no VAT charged, but the developer recovers all its build VAT — the feature the whole housebuilding industry is financed around. In between sit the reduced rates: 5% on qualifying conversions that change the number of dwellings and on renovating homes empty for two years or more — reliefs that contractors routinely fail to apply, leaving owners paying 20% on jobs that qualified for 5%; the saving must be captured in the builder's invoicing, not reclaimed later. Self-builders get their own route: the DIY housebuilders scheme refunds VAT on eligible costs of building a new home or converting a non-residential building, on a single claim within six months of completion.
Mixed-use purchases — the shop with the flat above — are apportioned: each element takes its own treatment, and the apportionment in the contract is worth agreeing rather than inheriting.
The buyer's checklist
Before exchange, five questions settle almost everything: Has the seller opted to tax, and can they evidence the notification? Is the building under three years old? Is a TOGC available and is there time to opt and notify properly? What is our recovery position — full, partial, none — and does the deal structure respect it? And has the SDLT been computed on the right (VAT-inclusive or TOGC-clean) number? Every expensive VAT-on-property story we have untangled failed at least one of these before completion, when all of them were still fixable.
Acumon's property VAT team advises on options, TOGCs, disapplications and recovery structuring, alongside SDLT advice for the interaction and property tax planning for the wider picture. The right time to ask is at heads of terms — by exchange, the answers are mostly already priced in, whether anyone checked them or not.