Although it is common to refer to a property when notifying an Option to Tax (OTT), an OTT actually applies to the land and includes the building standing on the land. It also applies to any buildings that are subsequently built on that land.
The OTT provisions do not differentiate between commercial or residential land or buildings and therefore, whilst it is more common for an OTT to relate to commercial land or property, an OTT can equally apply to residential land or property.
Circumstances where this could happen include where a business:
- buys a mixed commercial and residential building (shop on the ground floor, a flat above) and OTT the building; or
- buys a commercial building, OTT and later convert this commercial building to residential use; or
- buys a commercial building, OTT and subsequently demolish it and build residential properties.
Usually the supply of residential property will be zero-rated (new dwellings) or exempt (existing residential property) and will not be affected by any OTT in place.
However, where an OTT exists, the supply of residential property will only be zero-rated or exempt if the purchaser intends to continue to use it for residential purposes; that may be to live in themselves, to let as residential accommodation or to sell on as a residential building.
If the buyer intends to use the property as if it were a commercial property, then the OTT will apply to the sale and the sale will be standard-rated.
Example: a children’s nursery business buys a residential property on which an OTT exists, intending to use the property to operate their nursery business out of. Although the property is a residential property it is not being sold to someone who intends to continue to use it for residential purposes and so the OTT applies, and VAT would be chargeable on the sale.
It is therefore important for any business that is selling a residential property on which an OTT exists to obtain evidence from the buyer as to their intended use of the property after the sale.
Tax Questions? For further information on any tax query please contact the Vantage Tax Team.
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