When buying a property, the last thing you want is a nasty surprise in the form of extra taxes. One such surprise can come from Value Added Tax (VAT) on property purchases, especially when the seller has “opted to tax”.

First things first: What does “opted to tax” mean? When a seller “opts to tax” (also known as “electing to waive exemption”), they’re choosing to charge VAT on a property sale that would normally be VAT-exempt. Commercial property owners often do this to recover VAT on their property-related expenses.

So, do I always have to pay VAT if the seller has opted to tax? The short answer is: not always. There are several situations where you might avoid paying VAT, even if the seller has opted to tax. Let’s look at some scenarios:

1. The seller’s option to tax is old. If the seller opted to tax 20 or more years ago, they have the right to cancel this option. If they do, you won’t have to pay VAT. It’s worth asking the seller about this.
2. You’re buying a business property to continue the same business. If you’re buying a pub to keep running it as a pub, you might be in luck. If you register for VAT and opt to tax the building yourself, the sale can be treated as a “transfer of a going concern” (TOGC). In this case, the seller doesn’t charge VAT on the sale.
3. You’re converting a commercial property to residential use. Are you planning to turn that old shop into flats? If you give the seller a VAT1614D certificate stating your intention to convert the building to residential units, their option to tax won’t apply. This means the sale would be VAT-exempt.
4. The property will be used for a charitable purpose. If you’re buying the property for certain charitable purposes, VAT might not apply.

Let’s look at a real-world example:

Imagine two people are each buying a pub in Manchester. In both cases, the seller has opted to tax, which means the purchaser would normally have to pay VAT on top of the purchase price. This isn’t just about the VAT itself – it also increases the amount of Stamp Duty Land Tax they’d have to pay, as this is calculated based on the total price, including VAT. Understandably, neither buyer is thrilled about this prospect.

The first person plans to keep running the pub as a pub. In this case, if they register for VAT and opt to tax the building themselves, the sale can be treated as a TOGC. This means no VAT is charged, which solves their VAT and increases the Stamp Duty problem in one go.

The second person wants to convert the pub into residential flats. They can provide the seller with a VAT1614D certificate stating their intention to convert the building to residential use. This means the seller’s tax option won’t apply, and the sale becomes VAT-exempt.

In both cases, the correct approach can avoid what initially looked like a hefty extra tax bill.

What if none of these apply to me? If none of these situations fit your case and the seller’s option to tax stands, then yes, you’ll likely need to pay VAT on the purchase. However, if you’re VAT-registered and will use the property for taxable business purposes, you may be able to reclaim this VAT.

The bottom line: Property purchases can be complex, especially when it comes to VAT. While a seller’s option to tax can lead to VAT being charged, there are several ways you might avoid this extra cost. It’s always best to seek advice from a tax professional or accountant who can examine your specific situation and help you navigate these tricky waters.

Remember, understanding your VAT position early in the property buying process can save you from unexpected costs and help you budget more accurately. Don’t be afraid to ask questions and seek expert advice – it could save you a significant amount of money in the long run!