If you buy a property that would normally have VAT added to the cost, then TOGC is worth considering. Rather than buy a property, buy a property business. The HMRC have some specific terms that make this worth considering as part of your long term strategy. In addition Stamp Duty Land Tax (SDLT) is charged on the full price including VAT. In effect you are then paying tax on a tax. If your only reason for considering a property business is to avoid paying and reclaiming VAT or just to avoid paying additional SDLT on the VAT then be very careful. It’s unfair to pay tax on a tax but thats the way it is.
Examples of when a property business can be transferred as a TOGC – copied from HMRC website
• own the freehold of a property which you let to a tenant and sell the freehold with the benefit of the existing lease, a business of property rental is transferred to the purchaser. This is a business transferred as a TOGC even if the property is only partly tenanted. Similarly, if you own the lease of a property (which is subject to a sub-lease) and you assign your lease with the benefit of the sub-lease, this is a business transferred as a TOGC.
• own a building where there is a contract to pay rent in the future but where the tenants are enjoying an initial rent free period, even if the building is sold during the rent free period, you are carrying on a business of property rental.
• granted a lease in respect of a building but the tenants are not yet in occupation, you are carrying on a property rental business.
• own a property and have found a tenant but not actually entered into a lease agreement when you transfer the freehold to a third party (with the benefit of a contractual agreement for a lease but before the lease has been signed), there is sufficient evidence of intended economic activity for there to be a property rental business capable of being transferred.
• are a property developer selling a site as a package (to a single buyer) which is a mixture of let and unlet, finished or unfinished properties, and the sale of the site would otherwise have been standard rated, then subject to the purchaser opting to tax for the whole site, the whole site can be regarded as a business transferred as a going concern.
• own a number of let freehold properties, and you sell one of them, the sale of this single let or partly let property can be a TOGC of a property rental business.
• have a partially-let building this is capable of being a property rental business, providing that the letting constitutes economic activity. This may include electricity sub-stations or space for advertising hoardings providing that there is a lease in place.
• purchase the freehold and leasehold of a property from separate sellers without the interests merging and the lease has not been extinguished, providing you continue to exploit the asset by receiving rent from the tenant, then such a transaction can be a TOGC.
Examples where there is not a TOGC
• are a property developer and have built a building and you allow someone to occupy temporarily (without any right to occupy after any proposed sale) or you are ‘actively marketing’ it in search of a tenant, there is no property rental business being carried on.
• own the freehold of a property and grant a lease, even a 999-year lease, you are not transferring a business as a going concern. You are creating a new asset (the lease) and selling it while retaining your original asset (the freehold). This is true regardless of the length of the lease. Similarly, if you own a headlease and grant a sub-lease you are not transferring your business as a going concern.
• sell a property where the lease you granted is surrendered immediately before the sale, your property rental business ceases and so cannot be transferred as a going concern – even if tenants under a sublease remain in occupation When the lease is brought to an end the property rental business carried on by the former freeholder has ceased and cannot be transferred.
• sell a property freehold to the existing tenant who leases the whole premises from you, this cannot be a transfer of a going concern because the tenant cannot carry on the same business of property rental. This would remain the case even if the new freeholder vacated the property on acquisition and found a new tenant since when the lease is brought to an end the property rental business carried on by the former freeholder has ceased.
• have granted a lease in respect of a building and the tenant is running a business from the premises. The tenant then sells the assets of his business as a going concern and surrenders his lease to you. You grant the new owner of the business a lease in respect of the building. This is not a transfer by you of a property rental business.