VAT on commercial property

Option to Tax Explained: What It Means When You Are Buying

PropertyVAT Team · Updated 20 October 2026 · 3 min read

Of all the VAT concepts in commercial property, the option to tax causes the most expensive surprises. It is the single most common reason a buyer suddenly needs an extra 20% at completion.

What an option to tax actually is

Commercial property is exempt from VAT by default. An option to tax — sometimes called electing to waive exemption — is a formal decision by the owner to treat supplies of that property as standard-rated instead.

Once made and notified to HMRC, the owner charges VAT at 20% on rent and on any sale of that property. In return, they can recover VAT on costs relating to it.

It applies to a specific property or defined area of land, not to the owner's whole portfolio.

Why a seller would opt

It looks like a decision to make the property harder to sell. It is actually a decision about cost recovery.

For an owner who has spent meaningfully on a building, the recoverable VAT on costs usually outweighs the downsides. That is why opted property clusters at the better-maintained, more recently refurbished end of the market.

What it means for you as the buyer

Three consequences, in order of how often they catch people out.

1. You must pay the VAT at completion. It is legally due. You cannot withhold it pending your reclaim.
2. You pay stamp duty on the VAT-inclusive price. On a £1m purchase, SDLT is calculated on £1.2m. That extra stamp duty is not recoverable — unlike the VAT itself.
3. The seller's option does not pass to you. It obliges them to charge you VAT, but it does not make you an opted owner. If you intend to let the property and charge VAT on rent, or you need the sale to qualify as a TOGC, you must make and notify your own option.

That third point is the one that quietly breaks transactions. A buyer assumes they have inherited the seller's VAT position, does not make their own option in time, and the intended TOGC fails.

Timing: the part that goes wrong

An option to tax has two separate steps, and people conflate them:

• The decision to opt, made by the owner.
• The notification to HMRC, which generally must follow within 30 days of the decision.

HMRC acknowledges notifications, but acknowledgement is not instant and can take several weeks. If your transaction depends on your option being in place — a TOGC usually does — you need to start this well before completion, not in the final week.

Options are also not normally backdated. You cannot fix the position retrospectively once completion has passed.

How to check whether a property is opted

• Raise it in pre-contract enquiries, in writing.
• Ask for the notification and HMRC's acknowledgement letter.
• Check the special conditions in the contract or the auction legal pack.
• Where the seller cannot evidence an option, treat the position as unresolved rather than assuming exemption.

The funding consequence

If the property is opted, the VAT is due on the day. Your options are to fund it from your own capital and wait for the reclaim, to negotiate a TOGC where the facts genuinely support one, or to bridge the VAT so the completion date is not at risk.

The decision usually comes down to what that capital would otherwise be doing for the one to three months it would sit with HMRC.

This guide is general information, not tax advice. Option to tax rules are detailed and fact-specific — take VAT advice before exchange.