Does the seller need an option to tax on a new building?

No. The standard rating applies automatically by virtue of the building being new. An option to tax is irrelevant to that outcome, though it may matter for the seller's own cost recovery.

How is the three years measured?

Broadly from completion of construction, though the rules are more technical than a single date suggests. Do not count back from a planning portal entry — confirm the position with a VAT adviser.

What if the building was completed three years and one month ago?

It may fall outside the automatic standard rating, in which case the position reverts to the default exemption unless the seller has opted to tax. The margins here are narrow, so get the position confirmed.

Does this apply to converted buildings?

Conversions and substantial reconstructions raise their own questions, and the treatment depends on the nature of the works. This is an area where specific advice is particularly worthwhile.

VAT on commercial property

The Three-Year Rule: VAT on New Commercial Buildings

PropertyVAT Team · Updated 21 October 2026 · 3 min read

Most buyers who get caught by VAT were caught by an option to tax. A smaller group get caught by something they could not have negotiated away at all.

The rule

The sale of a new commercial building is standard-rated for VAT. Broadly, a building counts as new for around three years from completion of construction.

Two consequences follow, and both surprise people:

The seller has no choice. This is not an election. It applies by virtue of what the building is.
No option to tax is required. Buyers who ask only "has the seller opted to tax?" can get a truthful "no" and still face 20% at completion.

Why the question "has the seller opted?" is not enough

It is the standard enquiry, and on second-hand property it is the right one. On recently built property it is incomplete.

A better pair of questions:

Has the seller, or any previous owner, opted to tax?
When was construction of the building completed?

If the answer to the second is "within the last three years or so", expect VAT regardless of the answer to the first.

Which properties this catches

Newly developed industrial and logistics units
Recently completed office buildings
New retail and roadside developments
Buildings bought from a developer, including the first sale after practical completion

The common thread is that the seller is often the developer, and the sale is the first disposal after construction. These are exactly the transactions where a buyer is least likely to think about an option to tax, because there has not been an owner long enough to make one.

What it means in practice

The practical position is the same as any other standard-rated purchase:

	Effect
VAT at completion	20% of the purchase price, payable on the day
Recovery	Through your VAT return, if registered and entitled to recover
SDLT	Calculated on the VAT-inclusive consideration
Extra SDLT	Permanent and unrecoverable

On a £2m new industrial unit, that is £400,000 to find at completion, and stamp duty computed on £2.4m rather than £2m.

The timing trap

Because the rule turns on a date, deals near the boundary carry genuine uncertainty. A building completed three years ago may or may not fall within the rule depending on how the period is measured and the specific facts.

Do not resolve this yourself by counting back from a date on a planning portal. The rules are more technical than they look, and the difference between the two answers is 20% of the purchase price.

What to do

Ask when construction completed, as a standard enquiry alongside the option to tax question.
Get the answer in writing from the seller's solicitor.
Take VAT advice where the building is anywhere near the boundary.
If VAT applies, register the buying entity early — recovery normally depends on registration being in place at the point of purchase.
Budget SDLT on the VAT-inclusive figure.

Note also that a TOGC is unlikely to help here. TOGC treatment generally requires a letting business to transfer, and a newly completed building bought from its developer usually has no lettings to pass on.

This guide is general information, not tax advice. The rules on new buildings are technical and fact-specific — take VAT advice before exchange.

Frequently asked questions

Does the seller need an option to tax on a new building?: No. The standard rating applies automatically by virtue of the building being new. An option to tax is irrelevant to that outcome, though it may matter for the seller's own cost recovery.
How is the three years measured?: Broadly from completion of construction, though the rules are more technical than a single date suggests. Do not count back from a planning portal entry — confirm the position with a VAT adviser.
What if the building was completed three years and one month ago?: It may fall outside the automatic standard rating, in which case the position reverts to the default exemption unless the seller has opted to tax. The margins here are narrow, so get the position confirmed.
Does this apply to converted buildings?: Conversions and substantial reconstructions raise their own questions, and the treatment depends on the nature of the works. This is an area where specific advice is particularly worthwhile.

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