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Property VAT - changes to the option to tax rules

30 May 2008

Changes to the rules on the VAT option to tax, also known as the election to waive exemption, will come into play from 1 June 2008. While the main effect of the option to tax is remaining, allowing VAT to be charged on sales and leases of commercial property, some important new rules are being introduced which could affect many commercial property owners. Some of the key changes are highlighted below.

Conversions of non-residential buildings to residential use

Currently, a seller or landlords option to tax is disapplied on a sale of non-residential buildings which the buyer/tenant intends to convert for residential use. But from 1 June 2008, the buyer/tenant will have to issue a certificate to the seller/landlord in this scenario, in order for the option to tax to be disapplied. That certificate would state the buyer/tenants intention to convert the building to residential use, and should be issued to the seller/landlord before the price is legally fixed (or possibly later if the parties agree, but at least before the relevant VAT tax point).

This new certificate will also apply if there is a chain of transactions where the property has sold through one or more intermediate parties to an eventual buyer, who will then do the converting to residential use. So land owners and developers will need to think about this carefully, especially if they are in the middle of such a chain, so that they do not end up bearing the VAT cost unnecessarily on a transaction or chain of transactions, for example simply because of missing a certificate deadline.

Real estate elections

This new category of option to tax is being introduced to try and get round some of the problems with the current practice on making global options, for example where a land owner with a portfolio of properties might elect over, say, the whole of Wales or the City of London. From 1 June 2008, if you make a real estate election, you will be opting to tax over any properties you subsequently acquire. There will then be no need to notify HM Revenue & Customs (HMRC) of an option to tax each time you acquire a new property. Under the real estate election, each property is still treated as if it had been individually opted. So if you do make a real estate election but do not want a property you acquire to be opted over, you would have to ensure that the option was revoked on that property, using the "cooling off" procedure mentioned below (within the new six month deadline). While a real estate election may well suit land owners with large acquisition programmes, it will bring with it the need to check on each acquisition if opting to tax that property could cause problems, for example with any VAT exempt tenants. Once made, a real estate election cannot be revoked - but note the comments above on carving out individual properties.

"Cooling off"

Currently an option to tax can only be revoked within the first three months, or after 20 years. The new rules will allow the initial cooling off period to be extended from three to six months, and in certain instances you may no longer need prior consent from HMRC to revoke the option (subject to checking the detailed conditions on consent). A further change from 1 June 2008 means that an option to tax will automatically lapse as and when the owner has not held an interest in the property for six years.

Land and buildings

Currently HMRC practice allows an option to tax to be made separately over land, and the buildings on it. This can lead to problems when a building is demolished and new buildings constructed on the land, with the option over the building lapsing. From 1 June 2008, an option to tax will apply to both the land and buildings on it, doing away with this separate option treatment for land and buildings. But one relaxation will be that a land owner can carve out a newly constructed building from the option to tax, carrying on some of the previous flexibility.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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