Wondering about the option to tax meaning and how it affects property transactions? As expert tax consultants we can shine a light on everything you need to know about what option to tax property (OTT) is, when to apply it, and how it could impact your VAT position. 

In this blog, we will explain the option to tax meaning, when it might be beneficial, and why understanding this area is key for commercial property owners. Carry on reading for more information.

What is ‘option to tax’ in property terms?

When you hear about the option to tax, it is referring to the decision by a business to charge VAT on the sale or lease of a commercial or non-residential property. Normally, when you sell a property like this, it is exempt from VAT, which means you can’t recover the VAT you incur on related costs. But if you opt to tax, you make those supplies taxable, allowing you to reclaim input VAT on associated expenses.

Once made, an OTT stays with the property for 20 years. After this period, you can apply to HMRC to revoke it, potentially returning the property to an exempt supply status.

The rules around the option to tax property have been in place since 1989, meaning many early elections are now reaching the point where they can be potentially revoked. The process of opting in or revoking is relatively quick and easy. However, the implications for VAT recovery, property sales, and income management can be huge. Therefore, seeking professional advice from property accountants is crucial.

Option to tax meaning in full detail

If you are buying commercial property purely for your own business use, it’s highly unlikely you’ll need to opt to tax. You’re not making an exempt supply. You’re simply using the building to run your taxable business.

However, opting to tax could be extremely beneficial if you intend to rent out the building, sublet part of it, or eventually sell it on. Without an OTT, your rental or sale would usually be VAT-exempt. This means you can’t claim back any VAT on costs like legal fees, refurbishments, or agent commissions.

Making an OTT allows you to turn an exempt supply into a taxable one. This allows you to recover input VAT across many associated expenses, improving your cash flow. Some properties are not affected by an OTT at all, even if elected. For example, residential buildings and charities. Also, if a property has been previously leased out as exempt, you may need permission from HMRC to opt.

Changes to opting to tax meaning no acknowledgements

In 2023, HMRC updated their policy on option to tax, meaning they no longer send formal acknowledgements when you opt to tax a property development. 

This means you now need to keep robust evidence to prove:

  • the decision to opt was made
  • the option to tax notification (VAT1614A form) was submitted to HMRC

Best practices include:

  • saving the automated email reply you receive when submitting the VAT1614A form
  • clearly stating the property address, postcode, and effective date of the OTT in the subject line of your email
  • retaining the completed notification form itself
  • keeping proof of postage if submitting by post

Getting the details right on the notification is critical. Errors in the property address, missing signatures, or unauthorised signatories could invalidate the option.

Example of an option to tax property

Ms Smith purchases a newly developed commercial unit for £750,000, plus £150,000 VAT. As the building is classed as new (less than 3 years old), VAT is automatically chargeable on the sale.

Ms Smith plans to rent the unit to a logistics company for £35,000 per year. Without doing anything, her rental income would be VAT exempt and she would be unable to reclaim the £150,000 VAT paid on the purchase.

By opting to tax the property, Ms Smith:

  • charges VAT on her rent (£35,000 plus VAT at 20%)
  • recovers the £150,000 VAT on the purchase price
  • recovers VAT on associated legal, surveyor, and maintenance fees

The logistics tenant is VAT registered and can therefore recover the VAT charged, so the extra 20% does not put them off. Later, if Ms Smith decides to sell the unit, she would need to charge VAT on the sale. This is unless the sale qualifies as a Transfer of a Going Concern (TOGC) or she revokes her option (subject to rules and HMRC approval).

When can you opt to tax your land or buildings?

You can choose to opt to tax land or buildings at various stages, depending on your plans for the property.

Before acquiring the property: This often happens where a Transfer of a Going Concern (TOGC) is involved, and an option to tax is necessary to satisfy one of the TOGC conditions.

Prior to acquisition: Opting to tax before purchase also allows you to reclaim the VAT charged on the acquisition itself, as well as related expenses like legal fees or refurbishment costs.

After the property has been acquired: There’s no requirement to opt to tax immediately upon taking ownership or occupation. Many businesses choose to opt at a later date, especially if they later decide to lease or sub-lease part (or all) of the property to tenants. This turns what would otherwise be an exempt supply into a taxable one.

Do you need to exercise the option to tax property?

Choosing whether to exercise the option to tax property primarily comes down to one key question: do you want to reclaim VAT on the related costs? If you use the property purely for your own business purposes, you usually don’t need this option, as you are already making taxable supplies.

You should consider OTT if:

  • you’ll be renting the property to others
  • you expect significant refurbishment or professional costs
  • you’re selling a property and want to maximise VAT recovery

Other points to think about include:

  • Was VAT charged on your purchase or refurbishment?
  • Will tenants or buyers be able to recover VAT?
  • Could the Capital Goods Scheme apply? (affects input tax recovery on properties valued over £250,000)

What is the option to tax process?

The process for the opting to tax property has two formal steps:

  • Decision to opt: You make an internal decision that it’s in your best interests to opt to tax a particular land or property.
  • Notification to HMRC: You should submit your notification within 30 days of the decision

If your property has previously generated exempt income, you may also need permission from HMRC first (using form VAT1614H). If you decide to go for this option but fail to notify HMRC, the OTT isn’t legally valid. Problems often come to light years later, often during a sale, which leads to lost VAT and complex negotiations. Each party with an interest (like the buyer, seller, or tenant) must make its own OTT decision. One party’s election does not automatically bind another.

Revoking an option to tax

After 20 years, a business can ask HMRC to revoke an OTT. Permission is not always automatic. HMRC will check for any potential VAT loss or anti-avoidance issues first. In some cases, revoking the option to tax may even be possible earlier. For example, within six months of the original OTT or if specific anti-avoidance conditions apply.

This can be valuable when selling a property to a buyer unable to recover VAT. This potentially saves them VAT on the purchase and reduces SDLT (which is calculated on the VAT inclusive amount).

For example, a £1 million property without VAT would equal SDLT calculated on £1 million. With 20% VAT the SDLT is calculated on £1.2 million. Timely revocation can therefore make your property far more attractive to certain buyers. 

Contact the team at Williamson & Croft for more information on the option to tax property

Here at Williamson & Croft, our expert team of tax and accountancy specialists can advise you on the option to tax meaning for your specific situation. This is essential if you want to optimise VAT recovery and avoid costly pitfalls. Whether you’re acquiring new premises, letting out commercial units, or planning a sale, our VAT specialists are here to help.

Email info@williamsoncroft.co.uk for more information, or alternatively you can call us on 0161 399 0121 or 0151 303 3112. We have offices based in both Manchester and Liverpool if you’d like to come pay us a visit, or simply send us a message on our contact us page.

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