VAT can add a significant cost to buying or renting commercial property in the UK. A 20% VAT charge on a £600,000 property adds an extra £120,000 to the purchase price. However, there are several legal and HMRC-approved ways to structure the transaction so that VAT is not charged.

This guide explains when VAT applies, how to avoid it, and what steps buyers and landlords can take to minimise VAT costs.

When Is VAT Charged on Commercial Property?

Commercial property is generally exempt from VAT, except in two situations:

1. The property has been opted to tax

If the seller or landlord has opted to tax the property, VAT at 20% must be charged on rent or sale.

2. The property is less than three years old

Freehold sales of commercial buildings under three years old are automatically standard-rated for VAT.

If neither condition applies, the sale or rent is usually exempt from VAT.

How to Avoid Paying VAT on Commercial Property

1. Use TOGC (Transfer of a Going Concern)

A TOGC is the most common way to avoid VAT on a property purchase. It applies when you buy a property that is already operating as a business, such as a tenanted building, and you intend to continue that business.

TOGC conditions

To qualify, all of the following must be true:

• The property must be tenanted or part of an ongoing rental business.
• You continue the same business after purchase.
• You are VAT-registered or register before completion.
• If the seller has opted to tax, you must also opt to tax the property.
• The business must be capable of continuing without interruption.

If these conditions are met, the transaction is outside the scope of VAT, meaning no VAT is charged.

2. Buy a Property That Has Not Been Opted to Tax

If a property has not been opted to tax, the sale is usually VAT-exempt unless the property is less than three years old.

Before proceeding, request:

• Confirmation of the seller’s VAT option status.
• Evidence of any VAT previously reclaimed on the property.

Once a property is opted to tax, the decision is long-lasting and can normally only be revoked in limited circumstances.

3. Reclaim VAT (If Your Business Allows It)

If VAT is charged on the purchase or rent, you may be able to reclaim it through your VAT return.

You can recover VAT if:

• You are VAT-registered.
• The property is used entirely for taxable activities.

However, if your business makes VAT-exempt supplies (such as finance, healthcare, education, or charity activities), you may fall under partial exemption rules and may only reclaim part of the VAT.

4. Use a VAT Group Structure

If you operate multiple companies, a VAT group may help reduce VAT costs.

Benefits

• Supplies between companies within the same VAT group are ignored for VAT purposes.
• Internal rent or charges between group entities do not attract VAT.

VAT groups come with conditions and anti-avoidance rules, so professional advice is essential.

5. Avoid Opting to Tax (If You Are a Landlord)

If you own a commercial property and do not opt to tax it, rental income is typically VAT-exempt. This is beneficial when renting to tenants who cannot recover VAT, such as charities or small non-VAT-registered businesses.

However, if you reclaim VAT on construction or refurbishment costs, opting to tax may be required.

Common Mistakes to Avoid

• Assuming all tenanted properties qualify as TOGC.
• Forgetting to register for VAT before completion, which can prevent TOGC treatment.
• Believing all VAT is reclaimable without considering partial exemption.
• Not checking whether the seller has opted to tax the property.
• Opting to tax without understanding the long-term effects on future sale or rental.

Frequently Asked Questions

1. How to avoid VAT on commercial property?

You can avoid VAT if:

• The property is not opted to tax, and
• The building is older than 3 years (not automatically standard-rated).

OR

If buying, structure the sale as a Transfer of a Going Concern (TOGC).
In a TOGC, VAT is not charged even if the seller has opted to tax.

2. Can I reclaim VAT on a commercial property purchase?

You can reclaim VAT if:

• The property is opted to tax, and
• You are a VAT-registered business using the property for taxable supplies
  (e.g., renting to VAT-registered tenants, running a VATable business).

Renovation costs, legal fees, surveys, and building work VAT can also be reclaimed.

3. How to avoid VAT tax in the UK?

You cannot “avoid” VAT illegally, but you can legally structure transactions to reduce VAT impact:

• Buy property not opted to tax.
• Use TOGC rules for VAT-free transfers.
• Lease to tenants who cannot reclaim VAT (so you avoid opting to tax).
• Use VAT planning for property development and investment.

4. How do I avoid capital gains tax when selling commercial property in the UK?

CGT (or Corporation Tax for companies) can be reduced using:

• Business Asset Disposal Relief (in some trading scenarios)
• Rollover Relief (reinvesting gains into another qualifying property)
• Offsetting capital losses
• Incorporation (in some cases, companies have lower tax rates)

You cannot avoid CGT entirely, but you can defer or reduce it.

5. How can landlords avoid charging VAT on rent?

A landlord does not have to charge VAT if:

• The property is not opted to tax, OR
• They revoke an Option to Tax (only possible in limited circumstances).

Most landlords avoid VAT when tenants are small businesses or charities (who cannot reclaim VAT).

Final Thoughts

Avoiding VAT on commercial property is possible using methods such as TOGC, buying non-opted properties, VAT recovery, VAT grouping, and strategic use of the option to tax. However, VAT on land and property is complex and mistakes can be costly. Buyers and landlords should always seek specialist tax advice before completing a transaction.