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Many business owners look to purchase commercial property through their pension scheme and then lease it back to the business. There are a number of additional tax saving benefits of doing this, including capital gains tax exemption and tax relief on pension contributions.
In the process, the VAT – and the big question of who pays it – can be forgotten and at 20% of the value of the property, ignoring the issue could provide an unwelcome surprise especially if additional borrowing is needed.
So the guidance is simple, establish early on in the transaction whether or not a commercial property has an “Option to Tax” attached to it.
What effect does an option to tax on a property have?
Supplies of land and buildings are normally exempt from VAT. This means that no VAT is payable, but the person making the supply cannot normally recover the VAT incurred on their own expenses.
However, a decision can be made to opt to tax the land / buildings and once this is in place VAT must be added to any income generated from the subsequent sale or rental of the property. This in turn allows the SIPP or SSAS to recover the VAT on costs related to the property such as repairs or development costs.
Does the option to tax automatically pass from one owner to a subsequent owner when the property is sold?
No, each successive owner of a property can choose whether or not it wishes to opt to tax. However, it is important at outset to determine the VAT liability of any property transaction and carefully consider whether to opt to tax.
If VAT is payable on the purchase of the property then normally the Scheme would wish to recover the VAT expenditure on the purchase price and to do this the Scheme would need to register for VAT (if not already registered) and to opt to tax the property.
Can a SIPP or SSAS choose to de-register for VAT?
Yes but if the SIPP or SSAS chooses to de-register because their income is lower than the VAT deregistration limit (currently £79,000 in any rolling 12 month period) they will have to consider carefully the implications.
A deemed supply will take place on deregistration and consequently VAT would be payable to HMRC if a property has been opted to tax and VAT was charged (and claimed) when the property was first acquired by the SIPP or SSAS. The Scheme would then have to declare and pay VAT on the full value of the property upon deregistration
If you would like help or guidance on VAT in relation to pensions and commercial property read Our guide to Property and VAT or if you have a specific query then contact Karen Stettner, SIPP & SSAS Administrator on 01772 550778 or firstname.lastname@example.org.