Investors pay zero VAT on property transfer and less stamp duty

The VAT-efficient transfer of investment properties, either a single tenanted building or a property portfolio, can be complex and involved. If structured correctly, the arrangement can remove VAT from the selling/purchase price and reduce stamp duty land tax (SDLT) liabilities. This arrangement is known as the transfer of a going concern (TOGC).

Transfer of a going concern (TOGC) meaning

Transfer of a going concern (TOGC) is when a property buyer makes a purchase with the intention of continuing the same type of business being conducted within the building. This could be selling a property with tenants still in place, for example.

A TOGC is considered outside the scope of VAT, which is considered a benefit to the buyer. But there are several conditions that need to be met for an investment property being transferred to be regarded as a TOGC for VAT purposes. The key distinction is that what is being bought and sold is a “business” and not a tangible asset. Many conditions, guidelines and case law must be met for TOGC, and every situation is unique.

TOGC conditions

The most relevant conditions for TOGC are as follows:

• The property is being operated as a business by the vendor and has a tenant in situ (or lined up for occupation).
• The purchaser is going to operate the same kind of business as the vendor and will do so with no break in the business.
• Where the vendor is VAT-registered, the purchaser must be as well or, as a consequence of the purchase, register for VAT.
• If the vendor has opted to tax the property (or it is a commercial freehold that is less than three years old), the purchaser must opt to tax and notify HMRC before the sale is completed.
• The purchaser must confirm that the option to tax will not be disapplied for any reason.

Do you pay VAT on TOGC?

A TOGC falls outside the scope of VAT. From advising extensively in this area, we have seen a number of watchpoints. For example, where the transfer appears to meet the TOGC conditions listed above, but fails to qualify due to the execution of the transfer not being in line with all of the rules. As a result, the arrangement becomes a supply for VAT purposes. The ultimate risk lies with the vendor, as the vendor is the supplier, so that liability falls on them.

The most common problems that we have seen include:

• The purchaser is a newly created company and not VAT-registered or opted to tax and notified HMRC by the completion date.
• The seller is transferring the property to another company and then immediately onto the ultimate purchaser. That intermediary step means that the “operating the same kind of business” test fails.
• The buyer intends to occupy the property themselves, not use it for the purposes of carrying on a business.
• The buyer wants to change the incumbent leases immediately on acquisition, meaning that a different business is to be carried out.

Stamp Duty Land Tax (SDLT) meaning

Stamp Duty Land Tax (SDLT) is a type of tax that applies when you purchase a piece of land. If, for example, you buy a movable building, you will not have to pay SDLT, as it’s the land you’re paying on, and not the building.

You don’t need to pay VAT on stamp duty, as it is a tax in itself.

This tax needs to be paid to HMRC within 14 days of when the land purchase has been completed. Your conveyance solicitor will be able to calculate the stamp duty you owe.

How Moore Kingston Smith can help investors

We recently advised an investment fund on acquiring a commercial property portfolio from a group of companies carrying out a restructuring exercise. The group wanted to sell their freehold properties but to also remain in occupation under occupational leases. The agreed price was £60 million. The parties were mistakenly under the impression that the arrangements could be treated as a TOGC, so expected no VAT (and SDLT thereon) to be payable.

We advised on the best way to restructure the arrangements, which still allowed both parties to achieve their objectives. This meant that VAT of £12 million was not payable, together with additional SDLT of £600,000.

TOGC is a complex area, with no two scenarios being the same. The key is to plan from the outset and be clear on whether the TOGC conditions are met. It is important to ensure that the necessary steps are taken by the appropriate party to ensure that the transfer is correctly treated and executed.

Instructing a VAT specialist with experience in TOGC will help you ensure that all conditions are met. Get in touch with our expert real estate VAT team if you would like to discuss TOGC or any other issue you face as an investor.