VAT on commercial property

Buying Property From a Connected Party

PropertyVAT Team · Updated 21 October 2026 · 3 min read

Transfers between group companies, from a director to their company, or between family entities, follow the same VAT rules as any other sale. What differs is the level of scrutiny and two sets of provisions that only bite between connected parties.

The normal rules still apply

First, the ordinary analysis:

• Commercial property is exempt unless opted or new
• An option to tax makes the sale standard-rated
• TOGC can apply where a genuine business transfers
• SDLT is calculated on the VAT-inclusive consideration

A connected-party sale of opted property carries 20% VAT exactly as an arm's length one would. The money moves between related entities, but it is real VAT with real cash-flow consequences — and real stamp duty on top.

The anti-avoidance provisions

This is the first thing that is different.

Provisions exist to disapply an option to tax in certain circumstances, broadly aimed at arrangements where a connected party who cannot fully recover VAT ends up holding property in a way that produces an unintended advantage.

The conditions are detailed and involve, among other things, the land being within the Capital Goods Scheme and the occupier's recovery position.

The practical point for a buyer: you cannot assume an option to tax will hold simply because one has been made. Where the parties are connected and one of them has restricted recovery, take advice before structuring the transaction around the option.

Valuation

The second difference.

There are provisions allowing a supply between connected parties to be valued at open market value in certain circumstances — typically where the recipient cannot fully recover input tax.

The effect is that a transfer at an artificially low price does not necessarily produce an artificially low VAT charge. If the recipient is in a restricted recovery position, the transaction may be valued as if it had been at arm's length.

Why it is worth getting right

Connected-party transfers are often done for good reasons — succession planning, refinancing, separating trading from property, moving an asset into a pension. They are rarely about VAT.

But they create exactly the profile HMRC looks at: a transaction between related parties, possibly at a non-market price, possibly involving an entity with restricted recovery.

Three practical risks:

1. The option is disapplied, so an expected taxable sale becomes exempt — with consequences for the seller's own recovery, potentially including a Capital Goods Scheme clawback.
2. The price is challenged, producing more VAT than budgeted.
3. A TOGC is asserted but fails, because the "business" transferring was constructed rather than real.

Group transfers

Where both parties are in the same VAT group, supplies between them are generally disregarded, so the VAT question may not arise at all on the transfer itself.

That does not make the wider analysis disappear:

• Other taxes apply on their own terms
• The Capital Goods Scheme continues to run
• A change of use within the group can still trigger adjustments
• Joint and several liability applies across group members

What to do

1. Establish the VAT position properly, as you would at arm's length.
2. Take advice on the anti-avoidance provisions, particularly where either party has restricted recovery.
3. Document the commercial rationale for the transfer and the price.
4. Check whether the property is within a Capital Goods Scheme period.
5. If relying on TOGC, make sure a real business transfers, with facts that stand on their own.
6. Budget for the VAT and the stamp duty on the VAT-inclusive figure — connection does not remove either.

Point three is worth emphasising. Contemporaneous evidence of why the transaction was structured as it was is considerably more persuasive than an explanation constructed two years later in response to an enquiry.

This guide is general information, not tax advice. Connected-party anti-avoidance and valuation provisions are technical — take specialist VAT advice before the transfer.