VAT on commercial property: when it applies and how to fund it

Sometimes, but not always. The default position is that the sale or lease of an existing commercial property is exempt, so no VAT is charged. That default is overridden in two main situations. First, if the seller has exercised the option to tax over the property, the supply becomes standard rated and 20% is added to the price. Second, the sale of a new or part completed commercial building, generally one less than three years old, is standard rated by law and the seller cannot avoid it.

So whether you pay VAT on a given commercial property purchase depends on the age of the building and on whether the seller has opted to tax. Because the two positions look identical from the outside, you should always confirm the VAT status in writing before you exchange, usually through the replies to your solicitor's enquiries.

Where VAT applies, it is charged at the standard VAT rate of 20% on the net purchase price. On a property bought for 500,000, that is an extra 100,000 payable to the seller at completion. The commercial property VAT is added on top of the price you agreed, so it needs to be planned for in your cash flow, not treated as a rounding item.

Two points often catch buyers out. VAT is charged on the price before any deposit is netted off, and it can also affect your Stamp Duty Land Tax. Where VAT is due on a commercial purchase, SDLT is normally calculated on the VAT inclusive figure, so the tax bill rises as well. Confirm both numbers with your solicitor early so there are no surprises.

Most established commercial buildings are exempt from VAT on sale and on rent, unless something has changed the position. A property is generally exempt where it is more than three years old and the seller has not exercised the option to tax. In that case the seller charges no VAT and there is nothing for the buyer to reclaim.

Exemption is the reason many buyers assume commercial property is VAT free. It often is. The risk is assuming it always is. A single option to tax made years earlier by a previous owner, or a building that is newer than it looks, can turn an expected exempt purchase into a standard rated one. Always verify rather than assume.

The option to tax is a choice a property owner makes with HMRC to charge VAT on an otherwise exempt commercial property. Owners typically opt to tax so they can recover the VAT they have incurred on the building, for example on refurbishment or acquisition costs. Once an option to tax is in place, the owner must charge 20% on the sale and on the rent.

New buildings are treated differently. The freehold sale of a new or part completed commercial building, broadly one under three years old, is standard rated automatically, whether or not the seller has opted to tax. If you are buying a recently built unit, you should expect VAT. For more detail see our guides to the option to tax and to VAT on new builds and conversions.

One important exception is the transfer of a going concern. Where you buy a tenanted commercial property as an investment and continue running it as the same business, the deal can qualify as a TOGC, and no VAT is charged even if the property has been opted to tax. This is valuable because it removes the VAT from the transaction entirely.

TOGC is conditional. Broadly, the buyer must be VAT registered, must opt to tax the property themselves and notify HMRC before the relevant date, and the business must continue without a break. Miss a condition and VAT becomes due after all. Because the rules are strict, treat TOGC as something to confirm with your solicitor and accountant, and read our dedicated TOGC guide before you rely on it.

In most cases, yes. If you are VAT registered and buying the property for a taxable business use, you can usually reclaim the VAT charged on the purchase. The reclaim is made as input tax on your next VAT return, and HMRC then issues the VAT refund, commonly within one to three months of the return being submitted.

There are limits. If you will use the property to make exempt supplies, you may not be able to recover all of the VAT. There are also specific rules, such as the partial recovery that can apply to VAT on some leased assets, and the capital goods scheme for higher value property. Our guide to reclaiming VAT on a commercial property purchase covers the mechanics in full.

The ability to reclaim matters for funding as well as for tax. Because the VAT refund is what repays a VAT bridge, lenders want to see that you are VAT registered and that your reclaim is clean. Confirm your recovery position with your accountant before you complete, so that both your VAT return and your finance line up.

The timing problem is that VAT is payable to the seller at completion, but the HMRC VAT refund only arrives weeks later after your VAT return is processed. That gap can tie up a large sum of cash. A VAT bridge is short term finance designed to close it: the loan pays the 20% VAT at completion, and it is repaid from the refund when HMRC pays it out.

In practice the VAT bridging finance runs alongside your main funding. Your commercial mortgage or bridging loan covers the net purchase price, while the VAT bridging loan covers the VAT element only. Terms are typically short, often up to around six months, with interest that can be rolled up, an arrangement fee, and a clear exit: the VAT refund. The refund is the exit strategy, so lenders focus on your ability to reclaim.

We are a broker, not a lender, and VAT bridging on commercial property is unregulated commercial finance that is not regulated by the FCA. Nothing on this page is tax or financial advice. If you would like to fund the VAT on a purchase, talk to us and we will match your case to a suitable lender.