Purchase of commercial property then conversion to residential without paying VAT?

Hi,

Am considering buying a commercial property that has VAT payable but want to convert to residential immediately. I was told that it is possible to avoid the VAT if the property is converted within a set timescale of two years or similar. Can anybody verify this and how/where can I find out more?

Thanks in advance!

Purchase of commercial property for conversion to residential

Hi daddycoops

Yes there is such a scheme. You can find details of it in section 3 of VAT Notice 742A: Opting to Tax Land and Buildings here on teh HMRC website: http://tinyurl.com/3g32uz.

Normally if a commercial property owner/vendor has opted to tax a property, he has to charge VAT when he sells it. But if the purchaser intends to use or convert the property as a dwelling/dwellings or certain types of residential use, he can give the owner a certificate (Form VAT 1614D) which means that the owner can't charge VAT on the sale.

The important point is that the certificate must be given to the owner/vendor BEFORE THE PRICE IS LEGALLY FIXED, ie before contracts are signed, heads of terms etc. So it's important that you do this before anything is agreed about price.

The details are in the Notice and the Form can be downloaded from the HMRC website here http://tinyurl.com/le7vfh.

It's normal in these cases for the sales contracts to include reference to the VAT issues so your solicitor will probably need to know what you're planning to do before he starts to draw up the documentation.

Marie

You don't know happy I was to hear that news!

Marie,

Thanks ever so much for finding this out, I am extremely grateful to you and excited about the fact that one of my major hurdles has just fallen! All thanks to you!

Yours sincerely
Rob

Hi Rob

Glad to hear I could help, hope your project goes to plan! Just be careful about the detail of the VAT stuff, it's easy to make mistakes that could mess things up.

Guess it goes without saying that I'd appreciate you mentioning vatexchange to anyone you know who might need VAT advice - accountants, solicitors, anyone in the property business.

Marie

similar but different transaction

Hi Marie
Funny to stumble across you (via google) here - I'm John, blast from past, see my email address for full name :-)

Anyway, a friend has done a similar transaction, but with a difference. He bought a commercial property in London 2 years ago. At that point is was yr 24 of a 25yr lease. The building was opted to tax, but no VAT was applied to the purchase because TOGC (he set up a VAT reg UK LLP as the purchasing entity). Now the lease has ended, tenant has vacated. No new tenant has been found for the offices since last summer and there is a new plan to convert to residential. What are the VAT rules around the conversion to residential, in terms of un-opting to tax? Is there a VAT charge on un-opting? If that VAT charge is merely a recapture of input tax recovered by LLP that will be ok, because the amounts are small. If there can be a VAT charge on some kind of deemed sale of the building at fmv (£4mill, say) that would be much more difficult. Please can you point me in the right direction?!

Thanks and best wishes with VATExchange
John

VAT on converted opted property

Hi John

About 20 years since I left London, good to hear from you. But don’t you have a whole department of VAT experts at your disposal inhouse????

Unfortunately I have to plead the fifth on your query as it’s not one of those queries that can be answered by referring to a couple of paragraphs in a VAT notice. In situations such as the one you outlined, the VAT position could change significantly depending on a variety of factors, particularly the final use of the properties, i.e. will the owner sell the converted building or lease/ sell the individual units?

I know that you appreciate how complex these rules can be but in the circumstances that you describe, it could mean the difference between repaying some input tax or paying VAT on a deemed supply at 20% on £4m, i.e. £800k, so giving the wrong information could cause problems. And if the converted properties satisfy certain conditions, the sale or long lease (over 21 years) of the units may qualify for zero-rating in which case there would probably be no VAT cost.

Trying to summarise the rules that could apply here would just take too long.

There could also be a further complication caused by the fact that the property was acquired as a TOGC which could increase the VAT charge and also require the property owner to repay input tax that was paid by the previous owner.

Although I can’t give you a quick reply here, I’d be happy to have an initial chat with you about this as I can talk much more quickly than I can type! If you then want any more detailed advice, I can provide that through my consultancy service. Send me an email through the contact form and I’ll give you my contact details so you can call me.

Marie
13 March 2011

HMRC certificate 1614D

Dear Marie,
hopefully you can help me with this situation. I am looking to purchase a property at auction which attracts VAT, I plan to convert to a 'relevant residential purpose'. The vendor (a City Council) has confimred in writing their receipt of the the 1614D certificate, stating that 'our certification will disapply the Council's option to tax and, as a result, no VAT would be payable on ther completion monies.'

My question is what happens if we change our mind, for example 6 months after completion and decide to convert the building to a use that would not have allowed us to disapply the option to tax?
Thank you
Balj

Converting to residential and opting out of VAT

Hi Maria
Re your answer dated Thu, 13/05/2010 - 10:20Am.
I am also considering buying a commercial property that has VAT payable but want to convert to residential immediately, can you tell me what would happen if I fail to get the change of use granted, would I then be liable for the VAT? I have been told:
"If planning is rejected you are liable for Vat charged on the sale price. The vendor will not pursue you for this but HM Revenue and Customs may do. It is not guaranteed that they will but you will be liable for the Vat payment if they come after you"
If this is correct it is a concern as the VAT is 90% of the sale price.
My question is urgent as I need to move quickly - others are also interested in the property.
Thanks
Tony

Converting to residential

Hi Tony

You're really dealing with very complex areas of VAT planning here and I would strongly urge you to take proper advice about this issue. However I suspect that the issue that applies is the "change of use" provision which is explained in VAT Notice 708, section 19 here http://tinyurl.com/5vgbuzz. It applies when you purchase a property with the intention of using it for relevant residential purposes but then change your mind after purchase. In this situation it is YOUR RESPONSIBILTY to account for the VAT due. It's not a matter of HMRC coming after you for the tax, it is a matter of it being a VAT liability you have to declare. The same thing will apply to any purchasers in the same situation.

I'm a bit confused about VAT being 90% of the value when the VAT rate is 20%?

While I'm happy to point you in the right direction of where to find information on this issue, if the VAT cost is potentially so high then you need to invest in some proper advice. I doubt that your solicitor or accountant would be aware of the "change of use" provisions so you need specialist advice. I can only point you in the direction of where to find more information but even then I don't have the full facts and there may be other factors that you need to take into account. Plus the forum isn't the place for urgent queries.

I'd be happy to help through my formal consulting services. Just send me your contact details using the contact form and I'll be in touch within the next 24 hours.
Marie

Converting to residential

Hi Marie - and thanks for some of the most practical advice on the web in this space.
I've read the blogs from the last 2 years - and my circumstances apply to several of them.
I plan to buy an old pub and immediately convert it and use it as a residence.
I've downloaded the form you recommended. The pub is also over 20 years old (VAT life seems to have some Capital Goods implications).
I also believe I may be able to attain lower VAT (5%) on the costs of convering the pub to a residence (?).
I'm British, but domiciled overseas (I live much of the time in Australia), so I'm not a resident for tax purposes.
I'm also a self-funded retiree, so no income from employment and none from UK sources.
It's complicated - but I hope to legally avoid the need to pay tax as far as possible.
Right now I'm seeking council guidance as to the acceptability of the change of use proposal.
As the matter gets closer to becoming a transaction, I'll email your practice for services.
I thought you might like to see that the rest of the world is watching - and paying attention - and is impressed!
Cheers.
Publogger.

Converting to residential

Hi Publogger

Thanks for your positive comments - much appreciated! Sometimes I do wonder if anyone is reading...

I'm getting a lot of queries from people buying old pubs for conversion at the moment - guess the breweries must be selling a lot off.

But yes in principle you should be able to qualify for the reduced 5% rate on conversion to residential - have a look at VAT Notice 708 section 7.3 here http://tinyurl.com/cz5k53h. Remember to tell the brewery that you intend to convert the pub into a dwelling so that they don't charge VAT on the sale.

It may even be possible to recover this 5% VAT, quite legally, if this were done through a business. Sounds great in principle but the cost of doing this through a business might actually work out to be more expensive than the VAT! But worht considering if the conversion costs will be expensive.

Hope the purchase goes through okay and you get the planning permission for conversion.
Marie

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