Restructuring or Transferring Property - VAT Considerations

With changes to Inheritance Tax (IHT) coming into effect from April 2026, many farming businesses are reviewing their succession plans. This commonly involves transferring property, often of significant value, making it critical to consider the potential VAT implications early in the process.

Should VAT be charged on a transfer or sale?

Generally, the sale or transfer of the freehold in land or buildings is exempt from VAT, meaning no VAT would be payable. However, there are important exceptions:

• Opted land or buildings: where the seller has opted to tax the land or buildings.
• New non-residential buildings: A non-residential building is considered ‘new’ if completed within the last three years.
• New civil engineering works: These can also be subject to VAT if transferred within the relevant period.

In many cases, it’s possible to mitigate the VAT issues through careful planning. This includes:

• Transfer of a Going Concern (TOGC): If after transfer the property continues to be used in a VAT-registered farming business, and other conditions are met, the transfer could be treated as VAT-free.
• Charging and reclaiming VAT: If TOGC treatment is not possible and VAT was charged on the transfer, a VAT-registered recipient who carries on the taxable farming activity should be able to reclaim any VAT charged, resulting in no net VAT cost.

TOGC treatment may be preferable if SDLT is payable as this is calculated on the VAT inclusive value.

However, if VAT should have been charged but wasn’t, HMRC may impose penalties or charge interest.

HMRC keep a record of opted properties and commonly ask what has happened with them when a VAT registration is cancelled, so at some point in time are likely to identify the disposal of an opted property.

Gifting a property doesn’t remove the VAT risk. If the property is opted or classed as ‘new’, and VAT has been reclaimed on the purchase or construction, VAT may still be payable.

Capital Goods Scheme (CGS) considerations

While not charging VAT at the right time is often an issue that can be largely rectified after the event, the Capital Goods Scheme (CGS) can create a real and permanent VAT cost.

What is the CGS?

Amongst other things, the CGS applies to purchases of land or buildings and the construction or renovation of buildings where the VAT-inclusive cost is £250,000 or more.

In simple terms VAT on a CGS item is initially reclaimed in the normal way, so if a building, say a barn will be used solely for a taxable farming activity VAT is reclaimed in full. Under the CGS if the taxable use of the barn increases or in this case decreases over the CGS adjustment period of up to ten years, the VAT initially reclaimed has to be adjusted.

Using the barn example, if half way through the 10-year CGS intervals its use permanently changes to being wholly for exempt activities (e.g. being rented out), half the VAT initially reclaimed would have to be repaid over time.

CGS risks on property transfers

An exempt sale of a CGS item (e.g. of an empty building, or where TOGC conditions are not met) can trigger a CGS adjustment.

If there is an exempt sale halfway through the 10-year CGS adjustment period, 50% of the VAT reclaimed would have to be repaid. This VAT cannot be recovered from HMRC and the exempt supply cannot be undone.

Avoiding CGS issues:

If the transfer qualifies as a TOGC the buyer inherits the CGS obligations. If they continue to use the property for taxable faming activities until the CGS adjustment period ends no CGS adjustment would be required.

Opting to tax a CGS item could make an otherwise exempt disposal taxable avoiding any CGS adjustment.

Conclusion 

VAT implications when transferring, selling, or gifting land and property need to be carefully considered. Understanding the VAT status of the property and taking the correct steps early can prevent costly errors, avoid penalties, and ensure efficient tax planning.