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HMRC internal manual

VAT Transfer of a going concern

Land and property: Retention of interest

If the transferor of a property rental (or other) business  does not assign their entire interest in land, but instead  grants a slightly lesser interest this does not prevent the transaction from being treated as a TOGC for VAT purposes. Provided that the interest in land retained by the seller is small enough not to disturb the substance of the transaction, the transaction will be a TOGC if the usual conditions are satisfied.

HMRC will accept that the element retained by the transferor is sufficiently small for the possibility of TOGC to apply if the value of the interest retained is no more than one per cent of the value of the property immediately before the transfer (disregarding any mortgage or charge). Where more than one property is transferred at one time, this test should be applied on a property by property basis rather than for the entire portfolio.

If the interest retained by the transferor represents more than one per cent of the property, HMRC will regard that as strongly indicative that the transaction is too complex to be a TOGC.

The calculation should be based on the relevant part of the building only, and other areas of the building should be ignored in the calculation, as set out in the example below:

A Ltd owns the freehold of a four-storey building, valued at £4m, which A Ltd rents out commercially. The freehold in each floor is worth £1m. A Ltd sells its property rental business in one of the floors by granting to B Ltd a 999 year lease of that floor, under which A Ltd is entitled to receive a ground rent of £100 each year. The value of that right, together with any and all other rights retained by A Ltd in that floor, is £2,000.

A Ltd has retained 0.2 per cent of the value of its interest in the one floor, and 75.2 per cent of the value of its interest in the building as a whole. The 1 per cent figure is to be considered in relation to the one floor alone.  Provided all the normal conditions are satisfied, the transaction will be a TOGC, because HMRC will regard the 0.2 per cent interest retained as too small to disturb the substance of the transaction.


HMRC are taking this view as a result of the decision of the Tax Tribunal in the case of Robinson Family Ltd ([2012] UKFTT 360 (TC), TC 02046)

Robinson Family Ltd (RFL) were a property development company which purchased a 125 year interest in a site owned by the Belfast Harbour Commissioners, which it intended to develop into six units and grant sub-leases of these to third parties. The dispute between RFL and HMRC concerned one unit which RFL had been negotiating to let. There was a restriction imposed by the Belfast Harbour Commission against any sub-division of the site other than by the creation of sub-leases, so rather than sell its interest, RFL granted an interest of 125 years less three days to a purchaser subject to and with the benefit of the proposed letting.

The Tribunal found that, although RFL retained the head-lease that distant interest in a three-day reversion and the small economic interest that it represented in no way altered the substance of the transaction. The substance of the transaction was to put the transferee business in a position where it was able to continue the previous lettings business of RFL.