VAT on a commercial property purchase is meant to be recoverable, but the stamp duty charged on it is not, and the funding gap costs money too.
If a let commercial building that the seller has opted to tax fails to qualify as a transfer of a going concern, the buyer pays 20 per cent VAT on the price, stamp duty on the VAT-inclusive amount, and the cost of funding the VAT until it is recovered. On an illustrative 30,000,000 UK purchase that is 435,000, 1.45 per cent of the price, of which 300,000 of SDLT on the VAT is never recovered.
Worked in full in Real Estate Transaction Due Diligence by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A buyer acquires a let office building for 30,000,000. The seller opted to tax the building years ago, so a sale is standard-rated for VAT unless it is a TOGC: a transfer of the property rental business as a going concern, which is outside the scope of VAT. The buyer intends to opt to tax too, so it expects to recover any VAT it pays on its next return. All figures are illustrative, the SDLT bands are the non-residential bands to be checked for your completion date, and none of this is tax advice.
| Item | Value |
|---|---|
| Price, net of VAT | 30,000,000 |
| VAT rate | 20.0% |
| SDLT, non-residential: to 150,000 / 150,000 to 250,000 / above | 0% / 2% / 5% |
| Months from completion to VAT repayment | 3 |
| Cost of the VAT bridging loan / arrangement fee | 7.0% / 0.50% |
| Rent / other purchaser's costs | 1,800,000 / 1.8% of price |
1. SDLT as a TOGC. No VAT, so SDLT is on 30,000,000: 2% on the 100,000 band is 2,000, plus 5% on 29,750,000 is 1,487,500, a total of 1,489,500.
2. SDLT without a TOGC. VAT of 6,000,000 is chargeable, and SDLT is charged on the VAT-inclusive consideration of 36,000,000: 2,000 plus 5% on 35,750,000 gives 1,789,500.
Extra SDLT = 5% × VAT = 5% × 6,000,000 = 300,000, permanent
Funding the VAT = 6,000,000 × 7.0% × 3/12 = 105,000
Bridging fee = 6,000,000 × 0.50% = 30,000
Total = 300,000 + 105,000 + 30,000 = 435,000, 1.45% of price
In Excel, the SDLT on any consideration X is =MAX(0,MIN(X,250000)-150000)*2%+MAX(0,X-250000)*5%.
3. What it does to the yield. With TOGC, the gross cost is 30,000,000 plus SDLT of 1,489,500 plus other costs of 540,000: 32,029,500, a net initial yield of 5.62 per cent. Without it, 32,464,500 and 5.54 per cent, 8 basis points lower. The method is the one in how to calculate net initial yield with purchaser's costs.
| Case | Funding cost | Total cost | % of price |
|---|---|---|---|
| VAT repaid in 1 month | 35,000 | 365,000 | 1.22% |
| VAT repaid in 3 months | 105,000 | 435,000 | 1.45% |
| VAT repaid in 6 months | 210,000 | 540,000 | 1.80% |
| Buyer cannot recover the VAT | n/a | 6,300,000 | 21.00% |
The SDLT is 69.0 per cent of the cost in the base case and the only part that does not shrink when HMRC repays quickly. The last line is a different order of magnitude: a buyer that cannot recover input VAT, for example because its own option to tax would be disapplied by its intended use, bears the full 6,000,000 plus the SDLT on it, 14.5 times the cost for a buyer that can recover.
TOGC status depends on facts that the buyer controls as much as the seller. In outline, for a let property:
If a sale is treated as a TOGC and HMRC later disagrees, the seller is assessed for VAT that it never charged, and the contract usually lets it recover that VAT from the buyer. The buyer then also faces the extra SDLT on the VAT, plus interest, years after it stopped looking at the deal.
Because the VAT is recoverable, deal teams often treat a failed TOGC as a timing problem: borrow the VAT for a quarter and move on. The VAT is recoverable; the 300,000 of SDLT charged on it is not, and the bridging costs are real. On this building the cost equals 8 basis points of yield, about what a buyer gives up in a close bidding round. A missed notification by the buyer is the most avoidable way to lose it. For the other tax item that changes a property price, see how the latent tax discount is priced in a share deal.
The book works through technical, legal and financial diligence before signing, and the free workbook for this case sets each finding against what it recovers.
Yes. Where VAT is chargeable on the price, SDLT is calculated on the VAT-inclusive consideration. On a 30,000,000 purchase the 6,000,000 of VAT adds 300,000 of SDLT at the 5 per cent top rate for non-residential property, and that SDLT is not recovered when the VAT is.
In outline: the property rental business must pass as a going concern, with the leases; the buyer must opt to tax the property and notify HMRC no later than the relevant date, usually completion; and it must confirm that its option will not be disapplied. Missing the notification date alone turns a VAT-free sale into one costing 435,000 in the illustrative case.
Then the VAT itself becomes a cost. On the illustrative 30,000,000 building a buyer that cannot recover the 6,000,000 of VAT bears 6,300,000 with the SDLT on it, 21.00 per cent of the price and 14.5 times the cost for a buyer that can recover it. This is why TOGC status is checked in diligence, not at completion.
This article is one calculation from Real Estate Transaction Due Diligence. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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