VAT on commercial property

VAT on Commercial Leases and Rent

PropertyVAT Team · Updated 21 October 2026 · 3 min read

Most VAT guidance on commercial property is about buying. Leasing raises the same underlying question — has the owner opted to tax? — but the consequences play out monthly for years rather than once at completion.

The default and the exception

Granting a lease is an exempt supply of land. So rent carries no VAT by default.

If the landlord has opted to tax the property, that changes: rent becomes standard-rated at 20%.

As with a sale, the option belongs to the landlord. A tenant cannot decline it or negotiate it away after signing.

Who it actually costs

This is the whole question for a tenant, and it splits the market in two.

For a manufacturer or a firm of solicitors, an opted building is a cash-flow detail. For an insurance broker or a dental practice, the same building costs 20% more to occupy, permanently.

This is why opting to tax can narrow a landlord's tenant market, and why exempt occupiers should establish the position before they get to heads of terms.

Premiums and other payments

A lease can involve several payments and they do not all behave identically:

• Premium on grant. Follows the option — standard-rated if the landlord has opted, generally exempt otherwise.
• Reverse premium, paid by a landlord to induce a tenant. The treatment depends on what the tenant gives in return, and is not automatic.
• Service charge. Commonly follows the treatment of the rent where it is part of the same supply, but the position depends on the arrangement.
• Dilapidations. Often treated as compensation outside the scope of VAT, though this depends on the facts and HMRC's view in the particular case.
• Surrender payments. Treatment depends on who pays whom and why.

None of these should be assumed. They should be dealt with in the lease.

The lease wording that matters

Two tenants on identical rents can end up in different positions depending on one clause.

If the lease says rent is exclusive of VAT, the landlord can add VAT if they opt to tax during the term. If it is silent, or expressed as inclusive, the landlord may have to absorb it.

For a tenant that cannot recover VAT, this clause is worth real negotiation. The difference over a fifteen-year term is substantial.

The SDLT link

SDLT on the grant of a new lease is calculated on the net present value of the rent over the term — and VAT payable on the rent is included in that calculation.

So an opted building does not just increase the rent. It increases the stamp duty on the lease, and that additional SDLT is not recoverable, even by a tenant who recovers the VAT itself.

What to establish before signing

1. Has the landlord opted to tax the property? Ask for evidence, not an assurance.
2. If not, can they opt during the term, and does the lease let them add VAT to the rent?
3. Is the premium, if any, subject to VAT?
4. How are service charges treated?
5. Can your business recover VAT on rent? This determines whether any of the above matters to you.
6. Has SDLT been calculated on the VAT-inclusive rent?

The first and fifth questions together answer almost everything. If the landlord has opted and you cannot recover, you are looking at a materially more expensive building than the headline rent suggests.

This guide is general information, not tax advice. Lease VAT and SDLT are fact-specific — take advice before signing.