Every commercial property owner eventually faces the same decision: should we opt to tax? The answer depends on what you intend to do with the property, who your tenants are, and how much VAT you have already paid — or are about to pay — on the way in.
The default: exempt
By default, the supply of commercial property (sale or lease) is exempt from VAT. That sounds attractive — until you realise that exempt supplies mean the seller or landlord cannot recover the VAT on costs incurred buying, refurbishing or maintaining the property. The 20% you pay on the refurb is just a cost.
Why you would opt
By exercising the option to tax, the owner converts what would have been exempt supplies into standard-rated 20% supplies. The trade-off:
- You charge 20% VAT on rent and sale price going forward
- In exchange, you recover the input VAT on the purchase, refurbishment and running costs
For a property where significant VAT has been (or will be) incurred — a refurb, a redevelopment, a high-value purchase — opting can be worth a lot. The input VAT recovery often dwarfs the cost of the optional charge to tenants.
This decision matters beyond the single property, too. A portfolio that holds some opted buildings and some unopted ones is partly exempt, and VAT on shared overheads — professional fees, finance costs, anything that can't be tied to one specific building — has to be apportioned between the taxable and exempt sides rather than recovered in full. We cover how that apportionment works, and where the de minimis limit can let a mostly-taxable portfolio sidestep it entirely, in our guide to VAT partial exemption for property businesses.
Charging VAT on rent has a knock-on effect tenants often miss until it is too late to renegotiate: that VAT normally forms part of the consideration used to calculate SDLT on the lease, increasing the net present value the rent-based SDLT bands are applied to. See our guide to SDLT on commercial property leases for how the premium and rent are taxed separately, and where the VAT-inclusive rent figure quietly increases the bill.
Why you would avoid it
The 20% rent charge changes who can afford to be your tenant. Tenants who are themselves fully VAT-registered (most trading businesses) can recover it — for them, opting makes no difference. But tenants who are partially exempt or unregistered — banks, insurance brokers, charities, small medical practices — cannot recover the VAT and will pay it as a real cost. Opting narrows your tenant pool.
On sale, the VAT also has to be funded by the buyer up front, even if recoverable. That can affect deal pricing.
The 20-year lock-in
Once you opt, the option lasts 20 years. There are revocation windows (during the first six months in some cases, and after 20 years) but in the meantime the property is opted and that affects every supply you make from it.
The option is also property-specific. You can opt one building in a portfolio and not another, but once a building is opted, it is opted on the building.
The TOGC interaction
If you sell an opted property as a Transfer of a Going Concern (TOGC) — for example, with sitting tenants — and the buyer is registered for VAT and also opts before the relevant date, the sale can be treated as outside the scope of VAT. No VAT charged, no cash-flow drag for the buyer. TOGC mechanics are precise and the conditions need to be met carefully, but it is one of the cleanest ways to move opted commercial property without the VAT becoming a deal issue.
The option to tax also follows a tenant out the door, not just in. If a tenant later pays to surrender their lease early, that surrender premium is a supply of land in its own right and takes its VAT treatment from whether the property is opted — we cover this, along with the very different VAT treatment of dilapidations and reverse premiums, in our guide to VAT on dilapidations and lease surrenders.
A worked example
You buy a commercial unit for £500,000 + VAT (so £100,000 of input VAT). You spend £200,000 + VAT refurbishing (£40,000 input VAT). Total input VAT: £140,000.
If you do not opt, that £140,000 is a sunk cost. If you opt and let the property at £50,000 rent + 20% VAT, the tenant (a regular VAT-registered business) recovers the VAT and the let happens cleanly. You recover the £140,000. Easy decision.
Change one variable: now the only tenant you can find is a financial services firm that cannot recover VAT. They will not pay £50,000 + 20%. You either drop the rent meaningfully to compensate — or you do not opt, and you eat the £140,000. The right answer is no longer obvious. This is where the advice matters.
A purchase of this size also clears the £250,000 net threshold for the VAT Capital Goods Scheme, so recovering the £100,000 on the purchase isn't the end of the story either — a change of tenant or a change to the option itself within the following ten years can trigger a separate adjustment on top of everything above.
Before you opt
The option is a notification to HMRC and is straightforward to make. Reversing it is not. Before you opt, you want a clear view of likely tenants, likely sale dynamics, and the input VAT at stake over the foreseeable future. Get that wrong and you can be stuck with a 20-year decision that narrows your market.
This is one of the questions we field most regularly under our Property Advisory service — usually before purchase, sometimes before refurb, occasionally after the option has been made and the question becomes “what now?”
Common questions
What is the option to tax on commercial property?
It is a decision by the owner of commercial property to convert otherwise-exempt VAT supplies into standard-rated 20% supplies. In return, the owner can recover input VAT on costs related to the property.
How long does the option to tax last?
Twenty years. There are limited revocation windows — principally during the first six months and after the 20-year period — but in between, the option is binding.
Can I sell an opted property without VAT?
Sometimes, yes — under the Transfer of a Going Concern (TOGC) rules, when the property is sold with sitting tenants to a buyer who is VAT-registered and opts in turn before the relevant date. The conditions need to be met precisely.
Should I opt to tax my commercial property?
It depends on the input VAT at stake and the kind of tenant you want to attract. For most VAT-recovering tenants the option is neutral and recovering input VAT is a clear win. For partially-exempt tenants (financial services, healthcare, charities) the option narrows your market. The right answer is fact-specific — this is a conversation worth having before you commit.
Kieran Holsgrove is a Director and Co-Founder of Grafene Accounting, the property tax specialist firm based in Liverpool. He advises property developers, investors and landlords across Merseyside, Greater Manchester, Lancashire and Cheshire on tax structuring, developer VAT, SDLT and the long-view decisions that compound over the life of a portfolio.
This article is general information, not personal tax advice, and tax rules change. Your own position depends on facts we cannot see from here — please take advice before acting on anything above.