Key facts
- SDLT is calculated on the VAT-inclusive price when VAT applies to a property transaction.
- Commercial property can be subject to VAT where the seller has exercised the option to tax.
- New commercial buildings less than 3 years old are standard-rated for VAT (20%).
- Residential property sales are generally exempt from VAT, so VAT does not affect residential SDLT.
- A Transfer of a Going Concern (TOGC) may be outside the scope of VAT, removing the VAT element from the SDLT calculation.
The General Rule
SDLT is charged on the chargeable consideration for a land transaction. Where VAT is chargeable on a transaction, the VAT forms part of the chargeable consideration. In other words, SDLT is calculated on the VAT-inclusive price.[2]
This primarily affects commercial property transactions, because residential property sales are almost always exempt from VAT.
When VAT Applies to Property
| Transaction | VAT Treatment | Impact on SDLT |
|---|---|---|
| Sale of residential property | Exempt | No VAT in SDLT calculation |
| Sale of new commercial building (< 3 years old) | Standard-rated (20%) | VAT added to SDLT consideration |
| Sale of existing commercial building | Exempt (unless opted to tax) | VAT added only if option to tax exercised |
| Commercial lease (opted to tax) | Standard-rated (20%) | VAT on rent included in NPV calculation |
| Transfer of Going Concern (TOGC) | Outside the scope of VAT | No VAT in SDLT calculation |
The Option to Tax
The option to tax (also called “opting to tax”) allows a property owner to waive the VAT exemption on commercial property and charge VAT at 20% on sales and rentals.[1]
Key points:
- The option is made by the property owner (seller or landlord), not the buyer
- Once exercised, it applies to all supplies of that property (sale, lease, licence)
- The option can be revoked in limited circumstances (e.g. within 6 months if no supply has been made)
- It is commonly exercised to allow the property owner to recover input VAT on construction, renovation, or purchase costs
Impact on buyers: If the seller has opted to tax, the buyer pays the purchase price plus 20% VAT. SDLT is calculated on the total. A VAT-registered buyer can usually recover the VAT, but the additional SDLT (calculated on the higher total) cannot be recovered.
Worked Example
A company buys a commercial property for £500,000. The seller has opted to tax:
| Element | Amount |
|---|---|
| Property price | £500,000 |
| VAT at 20% | £100,000 |
| Total consideration for SDLT | £600,000 |
| Slice | Amount | Rate | SDLT |
|---|---|---|---|
| £0 – £150,000 | £150,000 | 0% | £0 |
| £150,001 – £250,000 | £100,000 | 2% | £2,000 |
| £250,001 – £600,000 | £350,000 | 5% | £17,500 |
| Total SDLT (with VAT) | £19,500 | ||
| SDLT without VAT (on £500,000) | £14,500 | ||
| Extra SDLT due to VAT | £5,000 | ||
Transfer of a Going Concern (TOGC)
If a property is sold as part of a Transfer of a Going Concern, the transaction is outside the scope of VAT and no VAT is charged. This can save significant SDLT:[3]
For a TOGC to apply:
- The seller must be transferring a business as a going concern (not just the property)
- The buyer must be VAT-registered (or become so)
- The buyer must opt to tax the property before completion (if the seller had opted to tax)
- The business must continue to be carried on by the buyer
VAT on Leases
When a commercial lease is subject to VAT (because the landlord has opted to tax), the VAT on rent is included in the NPV calculation for SDLT purposes. This increases the SDLT payable on the lease.[2]
The VAT treatment should be confirmed before the lease is signed to ensure the SDLT calculation is correct.
Tip: When buying commercial property, always check whether the seller has opted to tax. If they have, explore whether the transaction can be structured as a TOGC to avoid the VAT and reduce the SDLT bill. This requires careful planning and should be discussed with both your solicitor and accountant.
Frequently Asked Questions
Do I pay SDLT on the VAT as well?
Yes. When a property sale is subject to VAT, the SDLT is calculated on the total price including VAT. For example, a £500,000 commercial property with 20% VAT has a consideration of £600,000 for SDLT purposes.
What is the option to tax?
The “option to tax” allows a property owner to charge VAT on the sale or rent of commercial property that would otherwise be VAT-exempt. Once exercised, all supplies (sales or rentals) of that property become standard-rated at 20%.
Can I recover the VAT on a commercial property purchase?
If you are VAT-registered and the property will be used for taxable supplies, you can recover the VAT through your VAT return. However, the SDLT calculated on the VAT-inclusive price is not recoverable — it remains a real cost.
What is a TOGC?
A Transfer of a Going Concern is when a business (including its property) is transferred as a going concern. TOGC transactions are outside the scope of VAT, meaning no VAT is charged. This removes the VAT from the SDLT calculation, potentially saving a significant amount of SDLT.
Further Reading
- Commercial SDLT Rates — non-residential rate bands
- SDLT on Leases (NPV) — how SDLT is calculated on lease rent
- Mixed-Use Property & SDLT — rates for properties with residential and commercial elements
- Group Relief & Corporate Transfers — SDLT relief for intra-group transactions
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