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HMRC internal manual

VAT Transfer of a going concern

Property rental business: Tenants

The most common situation is where the freehold or leasehold owner or sells or assigns his interest in a property, which is currently let to tenants, and the benefit of the lease/leases to those tenants passes to the purchaser. There is no need for the whole property to be let out, the seller may occupy part of the premises himself or part may be vacant. The transfer of the building with the tenants is still a TOGC.

The important point above is that if there are tenants before and after the transaction this is a property letting business. The tenant’s status should be formalised in that there is a lease or agreement between landlord and tenant. This would be distinguished from an ‘informal’ arrangement where there is no such agreement or there is no business activity to transfer.

A building owner may sell his property with the benefit of tenants who under the terms of the contract, are enjoying an initial rent-free period. The seller has a tenant in place and therefore can be regarded as carrying on a property rental business which is thus capable of being transferred.

Once a lease has been granted to a tenant the business can be said to be in operation. Consequently where a formal lease has been granted to a tenant but he has not yet occupied the building, the sale of the freehold would still be the transfer of a property rental business and a TOGC for VAT purposes. Even where the tenants have not actually signed the lease, provided that there is a signed agreement for lease or a contract for a lease that is also transferred, the transfer could be a TOGC.

Where a property owner or developer allows someone to occupy a building on a temporary basis (without any right to occupy after any proposed sale) or the property is merely being actively marketed, then any transfer of the property is not covered by the TOGC provisions and is liable to tax in the normal way. This is because no rental property business has actually been carried on and there is therefore no business to be transferred.

If the freehold in a property is sold to the existing tenant, who currently rents the whole property, the transfer is not a TOGC. The tenant is not using the property to carry on the same property rental business. However, if the purchaser is only one of several existing tenants and the freehold is sold to him with the benefit of the other tenants’ leases, a TOGC of a property rental business can be seen as taking place.

Where an investor in property who owns a number of let properties, sells one to another investor this is capable of being a TOGC of a property rental business. The single property being sold would have to be let or partly let.

If a number of properties are sold together as a single portfolio, this can be a single TOGC, even if not all the properties are let. The TOGC rules apply to the transfer of a business and not to an asset of that business.

The TOGC provisions apply equally to domestic as well as commercial property rental businesses. Whilst there is no tax due, it can be an advantage to the parties to treat the transaction as a TOGC in order that they may recover the input tax on costs subject to the normal partial exemption rules.