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Unwinding an option to tax a property

As a landlord, making an option to tax a property can reduce your costs by allowing you to reclaim VAT on your expenses. But an option can work against you, e.g. by limiting the market when you sell. In what circumstances can you revoke an option?

Opting to tax

Letting a commercial property is usually an exempt supply for VAT purposes. The exemption applies to any supply of a building that’s more than three years old, apart from short-term leases or lets. As a landlord this means that in most circumstances you can’t reclaim VAT paid on costs related to the property. Opting to tax a property makes your supply of it VATable and so allows you to reclaim VAT subject to the usual rules.

Tip. Having opted to tax a property, if the rents etc. you charge total less than £83,000 per annum you can deregister for VAT (assuming you’re not required to be registered for another reason) and keep some or all of the advantage you’ve gained from reclaiming VAT on costs.

Trap. The option to tax lasts 20 years so if you deregister but need to reregister within that time you’ll have to charge VAT on rent again. After 20 years you can revoke the option.

Property sales and options

When you sell a property for which you’ve opted to tax, the option doesn’t pass to the new owner. It’s up to them to decide whether or not to opt. If they do their option will run for 20 years from the time it applies before it can be revoked, although there are exceptions.

Revoking a recent option

If you’ve opted to tax but change your mind within six months you can revoke it as long as you haven’t claimed back any VAT or made any supplies, e.g. charged rent, of the property.

Residential and commercial use

For a mixed property, e.g. where it consists of a shop below and a flat above, the option to tax only affects the shop, i.e. the commercial part. When you sell the property you must apportion the price between the commercial element and the residential part.

Revoking an option in other situations

There are circumstances in which you’re allowed to disapply your option to tax when you sell the property, and the purchaser:

  • wants to convert the property for residential use, for example a barn conversion
  • is a housing association that intends to use the property for residential purposes
  • is a charity which intends to use it for qualifying (charitable) purposes.

In each case the purchaser must provide you with written confirmation of its intent. But before you go ahead with a sale in one of these situations take advice from your accountant as it can result in a clawback of VAT you’ve reclaimed.

If you change your mind about the option within six months you can revoke it as long as you haven’t made VATable supplies of the property, e.g. charged rent. Otherwise an option applies for 20 years. An option can also be disapplied when you sell the property to someone who intends to use it for charitable or residential purposes.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit or call 01233 653500.

27th Jun 2023 11:54

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