Property types and scenarios

VAT on Sale and Leaseback

PropertyVAT Team · Updated 21 October 2026 · 3 min read

Sale and leaseback looks like an investment purchase with a tenant already in place. For VAT purposes it behaves differently, and the difference catches buyers who assume the TOGC route is available.

Two supplies, not one

A sale and leaseback comprises:

1. The sale of the property by the occupier to the investor
2. The grant of a lease back by the investor to that occupier

These are separate supplies, each requiring its own analysis. The sale may be standard-rated or exempt depending on the seller's option to tax and whether the building is new. The leaseback is a grant of a lease, exempt unless the new owner opts to tax.

Why TOGC is harder here

On an ordinary let investment purchase, TOGC works because the seller has a property letting business — tenants, leases, rent — and the buyer continues it.

In a sale and leaseback, the seller is typically an occupier, not a landlord. They have been using the building for their own trade. There is often no existing letting business to transfer, because the letting only comes into existence at the moment of the transaction.

That is a materially weaker starting point for TOGC treatment than a standard investment sale, and buyers who budget on TOGC because "there's a tenant in place" are reasoning from the wrong facts.

Take advice specific to the structure rather than importing the analysis from a normal investment purchase.

The practical consequence

If the seller has opted to tax and TOGC does not apply, VAT at 20% is payable on the sale.

On the lot sizes typical of sale and leaseback — often corporate occupiers releasing capital from substantial assets — that is a large cheque on a single day.

The buyer's option to tax

As the investor, you will usually want to opt to tax, for two reasons:

• To recover the VAT on your purchase
• To charge VAT on the leaseback rent, keeping your recovery position clean

But the second has a consequence worth examining before you price the deal.

Can the seller-tenant recover?

This is the question that should be asked at heads of terms.

If you opt to tax, the seller — now your tenant — pays VAT on rent for the life of the lease.

• Fully taxable tenant (manufacturer, retailer, most trading businesses): broadly neutral, they recover it.
• Exempt or partly exempt tenant (some financial services, insurance, healthcare): a straight 20% increase in their occupancy cost, permanently.

Sale and leaseback is common among corporate occupiers, and some of the most active sectors — financial services, healthcare — are precisely those with restricted recovery.

A rent that looked affordable at £500,000 becomes £600,000 to a tenant who cannot recover. That affects covenant strength, and it affects what rent is genuinely sustainable over the term.

The lease wording

Make sure the leaseback deals explicitly with VAT:

• Is the rent exclusive of VAT, so you can add it if you opt?
• What happens if you opt to tax during the term?
• How are service charges treated?
• Who bears VAT on any premium?

A lease silent on VAT, where the landlord later opts, creates an argument at the worst possible time — with a tenant who is also the party you bought the building from.

What to establish

1. Has the seller opted to tax the property? Get the evidence.
2. Is TOGC treatment genuinely available on this structure, with advice — not assumed.
3. Will you opt to tax, and have you notified HMRC in time?
4. Can the seller-tenant recover VAT on rent?
5. Does the lease allow VAT to be added to the rent?
6. Is funding in place for the VAT if it is payable on the sale?

This guide is general information, not tax advice. Sale and leaseback VAT and TOGC analysis is structure-specific — take specialist advice before exchange.