LPC ADVANCED COMMERCIAL PROPERTY SUMMARY
KEY ELEMENTS OF COMMERCIAL PROPERTY AGREEMENTS FOR SALE
1. VALUE ADDED TAX (VAT) - maybe payable for a supply of a good or services made in the ‘course of
business’
• Input tax – VAT incurred on supplies MADE TO YOU (aka VAT on things you buy/services received)
• Output tax – VAT incurred on supplies MADE BY YOU (aka VAT on things you sell/services you provide)
• If output tax > input tax = pay HMRC difference
• If input tax > output tax = get rebate from HRMC
TYPES OF SUPPLY EXAMPLE OF COMMERCIAL PROPERTY TRANSACTIONS
1) EXEMPT (VAT is NOT sale of OLD freehold property, sale of greenfield site, grant of new/old
payable) * subject to option to lease, surrender of lease
tax
2) ZERO-RATED (payable at
0%) - still subject to tax rules
3) STANDARD-RATED (payable Professional services, sale of NEW freehold property, grant of option
at 20%) SCPC 2.1 to purchase a new freehold property, construction services,
repair/alteration/demolition works
Note: NEW means 3 YEARS OLD OR LESS from date of SUPPLY
OLD means MORE THAN 3 YEARS OLD
Option to tax (aka option to waive exemption)
• Occurs when the owner of an EXEMPT commercial property voluntarily chooses to convert property
into a STANDARD-RATED supply
• This decision is personal to each owner, done on a property by property basis and is difficult to revoke
• For option to tax to be valid, owner must give WRITTEN notice to HMRC within 30 DAYS of making the
option and receive an acknowledgement from them
REASONS FOR OPTING TO TAX REASONS AGAINST OPTING TO TAX
• Allows seller to recover VAT they paid on • Increases the purchase price of the property and
good/services to develop or decorate the reduces pool of potential buyers
property
• Adds VAT to sale price and to rent while • Person is not registered for VAT
landlord
• Party being charged VAT cannot recover any VAT
because they make exempt supplies (aka VAT sensitive
companies) - e.g. Banks, charities, schools, etc.
• Sale price/rent stated in contract is INCLUSIVE of VAT
Transfer of a going concern (TOGC) – use Part 2 Condition A2
• Occurs when a transfer is treated as a business sale instead of a property sale
• Buyer does not pay VAT (because it is outside scope of VAT), but both parties must elect to do this
BEFORE COMPLETION
• must include provisions in contract to cover if a commercial property is a TOGC
• this is good method for minimizing VAT payable
• usually applies when dealing of with a property with various leases/rent
1
,GUIDE TO ANSWERING VAT QUESTION ON EXAM
A. Identify the type of transaction and determine VAT status of property (i.e. exempt/zero/standard-
rated)
For STANDARD-RATED transactions:
• Check if supplier is registered for VAT and get evidence of VAT registration (I.e. registration no and
certificate)
− Need turnover of £85,000 or more to be registered for VAT
For EXEMPT transactions, check if seller intends to opt to tax
• If SELLER opts to tax
− Use Condition 2 in SCPC (3rd ed)
− Get copy of notice to HMRC AND copy of acknowledgement of option by HMRC
− Check if seller is registered for VAT and get evidence of VAT registration (i.e. certificate &
registration no.)
• If SELLER DOES NOT opt to tax
− Disapply apply SCPC Condition 2
− Incorporate Part 2 Condition A1 in SCPC 3rd ed into draft contract
*Note: the conditions in Part 2 of SCPC do NOT apply unless they are expressly incorporated into the
contract – SCPC 1.1.4(b)
− Seller must also:
o Warrant that sale of property is not a taxable supply for Vat purposes;
o Agree not to exercise the option to tax in relation to property; and
o Cannot require buyer to pay VAT unless a change in law is made and comes into effect
between exchange of contract and completion which causes the sale of the property to be a
taxable supply.
• Check of buyer wishes to opt to tax AFTER COMPLETION
• Get VAT receipt/invoice on COMPLETION from the SELLER– SCPC 2.2 (3rd edition)
• Pay SDLT on purchase price AND on VAT (aka tax on tax)
• *Note: Calculate SDLT using sum of purchase price + VAT amount. Don’t calculate SDLT separately
for each.
STAMP DUTY LAND TAX FOR COMMERICAL LEASES
• SDLT is payable on the proportion or the consideration the falls within each tax band
• For a new leasehold, you pay SDLT on both the purchase price of the lease (‘lease premium’) + NPV
of rent
• For an existing (‘assigned’) leasehold, you only pay SDLT on the lease price (‘consideration’)
• SDLT must be paid within 30 days of completion of the lease
• SDLT rates:
o 0% on consideration up to £150,000;
o 2% on consideration between £150,001 and £250,000; and
o 5% on consideration greater than £250,000
2. PRE-CONTRACT SEARCH AND ENQUIRIES - done by the buyer’s solicitors
• Utility searches – check If electricity, water, gas affect the property or interfere with the land
• Local Land Charges searches
2
, o LLC1
o Enquiries of Local Authority (CON29 & CON29O) – for a big property transaction best
practise to raise all optional enquiries
• Drainage and Water Search (CONDW)
• Company search against seller – check financial strength
• Environmental search – check the current pollution in land
• Physical inspection/survey – surveyor will tell us if land is suitable for development
• Highways search – check if the highways are publicly owned or if its private land
• Coal mining search
o Brine extraction and minerals from water is common in Cheshire (Cheshire Salt Search)
• Index Map Search – confirms titles.
o Mandatory for unregistered land and good practice for registered land
• Flood search – shows risk of flooding
• Chancel check – check is there is s medical parish in the area in need of repair
• Title Issues to look out for:
Check if registered owner matches name of seller
o If it doesn’t, obtain evidence of change of name (I.e. change of name certificate)
References to previous conveyances or deeds of grant between seller and previous vendor
Ransom strips
If terms of pervious lease have been complied with
Is seller giving full or limited title guarantee?
Does seller have full, limited, or no freehold title OR absolute, good, limited leasehold title
o Good leasehold title – is the 2nd best type of title. It means the Land registry hasn’t seen
evidence of the original title where the lease originates from.
Title plan matches property being sold
Exclusion of mines and minerals from land
o If mines and minerals are excluded, get seller of pay indemnity insurance to cover the
risk
3. CONTRACT OF SALE
Key issues to look for in the draft contact:
• Deposit price – how is the money being held by the seller’s solicitor (SCPC 3.2.2)
o Ensure deposit is held by the BUYER’S SOLICITORS as stakeholder instead of SELLER holding
it as agent because
If held as agent – VAT is payable on deposit AT EXCHANGE
If held as stakeholder – VAT is only payable AT COMPLETION
• VAT position
o Buyer needs to make enquiries of the seller about their VAT position and get then to
warrant they won’t change it after exchange if contracts
o Key point: If the contract is silent on VAT, the default position is that the transaction is a
standard-rated supply and the buyer will pay VAT in additional to the purchase price – SCPC
2.1 &2.2
• Insurance/Risk – who bears risk of insuring property?
o Usual position: risk passes to buyer in exchange – SCPC 8.1
o Exception: for properties sold subject to leases, the seller is responsible for insuring the
property – SCPC 8.2.2 & 8.2.3
• Property Definition – check it matches property outlined in title plan
o If it doesn’t, you can fix contract by attaching title plan,
• Is the property sold with vacant possession or subject to existing leases?
3
KEY ELEMENTS OF COMMERCIAL PROPERTY AGREEMENTS FOR SALE
1. VALUE ADDED TAX (VAT) - maybe payable for a supply of a good or services made in the ‘course of
business’
• Input tax – VAT incurred on supplies MADE TO YOU (aka VAT on things you buy/services received)
• Output tax – VAT incurred on supplies MADE BY YOU (aka VAT on things you sell/services you provide)
• If output tax > input tax = pay HMRC difference
• If input tax > output tax = get rebate from HRMC
TYPES OF SUPPLY EXAMPLE OF COMMERCIAL PROPERTY TRANSACTIONS
1) EXEMPT (VAT is NOT sale of OLD freehold property, sale of greenfield site, grant of new/old
payable) * subject to option to lease, surrender of lease
tax
2) ZERO-RATED (payable at
0%) - still subject to tax rules
3) STANDARD-RATED (payable Professional services, sale of NEW freehold property, grant of option
at 20%) SCPC 2.1 to purchase a new freehold property, construction services,
repair/alteration/demolition works
Note: NEW means 3 YEARS OLD OR LESS from date of SUPPLY
OLD means MORE THAN 3 YEARS OLD
Option to tax (aka option to waive exemption)
• Occurs when the owner of an EXEMPT commercial property voluntarily chooses to convert property
into a STANDARD-RATED supply
• This decision is personal to each owner, done on a property by property basis and is difficult to revoke
• For option to tax to be valid, owner must give WRITTEN notice to HMRC within 30 DAYS of making the
option and receive an acknowledgement from them
REASONS FOR OPTING TO TAX REASONS AGAINST OPTING TO TAX
• Allows seller to recover VAT they paid on • Increases the purchase price of the property and
good/services to develop or decorate the reduces pool of potential buyers
property
• Adds VAT to sale price and to rent while • Person is not registered for VAT
landlord
• Party being charged VAT cannot recover any VAT
because they make exempt supplies (aka VAT sensitive
companies) - e.g. Banks, charities, schools, etc.
• Sale price/rent stated in contract is INCLUSIVE of VAT
Transfer of a going concern (TOGC) – use Part 2 Condition A2
• Occurs when a transfer is treated as a business sale instead of a property sale
• Buyer does not pay VAT (because it is outside scope of VAT), but both parties must elect to do this
BEFORE COMPLETION
• must include provisions in contract to cover if a commercial property is a TOGC
• this is good method for minimizing VAT payable
• usually applies when dealing of with a property with various leases/rent
1
,GUIDE TO ANSWERING VAT QUESTION ON EXAM
A. Identify the type of transaction and determine VAT status of property (i.e. exempt/zero/standard-
rated)
For STANDARD-RATED transactions:
• Check if supplier is registered for VAT and get evidence of VAT registration (I.e. registration no and
certificate)
− Need turnover of £85,000 or more to be registered for VAT
For EXEMPT transactions, check if seller intends to opt to tax
• If SELLER opts to tax
− Use Condition 2 in SCPC (3rd ed)
− Get copy of notice to HMRC AND copy of acknowledgement of option by HMRC
− Check if seller is registered for VAT and get evidence of VAT registration (i.e. certificate &
registration no.)
• If SELLER DOES NOT opt to tax
− Disapply apply SCPC Condition 2
− Incorporate Part 2 Condition A1 in SCPC 3rd ed into draft contract
*Note: the conditions in Part 2 of SCPC do NOT apply unless they are expressly incorporated into the
contract – SCPC 1.1.4(b)
− Seller must also:
o Warrant that sale of property is not a taxable supply for Vat purposes;
o Agree not to exercise the option to tax in relation to property; and
o Cannot require buyer to pay VAT unless a change in law is made and comes into effect
between exchange of contract and completion which causes the sale of the property to be a
taxable supply.
• Check of buyer wishes to opt to tax AFTER COMPLETION
• Get VAT receipt/invoice on COMPLETION from the SELLER– SCPC 2.2 (3rd edition)
• Pay SDLT on purchase price AND on VAT (aka tax on tax)
• *Note: Calculate SDLT using sum of purchase price + VAT amount. Don’t calculate SDLT separately
for each.
STAMP DUTY LAND TAX FOR COMMERICAL LEASES
• SDLT is payable on the proportion or the consideration the falls within each tax band
• For a new leasehold, you pay SDLT on both the purchase price of the lease (‘lease premium’) + NPV
of rent
• For an existing (‘assigned’) leasehold, you only pay SDLT on the lease price (‘consideration’)
• SDLT must be paid within 30 days of completion of the lease
• SDLT rates:
o 0% on consideration up to £150,000;
o 2% on consideration between £150,001 and £250,000; and
o 5% on consideration greater than £250,000
2. PRE-CONTRACT SEARCH AND ENQUIRIES - done by the buyer’s solicitors
• Utility searches – check If electricity, water, gas affect the property or interfere with the land
• Local Land Charges searches
2
, o LLC1
o Enquiries of Local Authority (CON29 & CON29O) – for a big property transaction best
practise to raise all optional enquiries
• Drainage and Water Search (CONDW)
• Company search against seller – check financial strength
• Environmental search – check the current pollution in land
• Physical inspection/survey – surveyor will tell us if land is suitable for development
• Highways search – check if the highways are publicly owned or if its private land
• Coal mining search
o Brine extraction and minerals from water is common in Cheshire (Cheshire Salt Search)
• Index Map Search – confirms titles.
o Mandatory for unregistered land and good practice for registered land
• Flood search – shows risk of flooding
• Chancel check – check is there is s medical parish in the area in need of repair
• Title Issues to look out for:
Check if registered owner matches name of seller
o If it doesn’t, obtain evidence of change of name (I.e. change of name certificate)
References to previous conveyances or deeds of grant between seller and previous vendor
Ransom strips
If terms of pervious lease have been complied with
Is seller giving full or limited title guarantee?
Does seller have full, limited, or no freehold title OR absolute, good, limited leasehold title
o Good leasehold title – is the 2nd best type of title. It means the Land registry hasn’t seen
evidence of the original title where the lease originates from.
Title plan matches property being sold
Exclusion of mines and minerals from land
o If mines and minerals are excluded, get seller of pay indemnity insurance to cover the
risk
3. CONTRACT OF SALE
Key issues to look for in the draft contact:
• Deposit price – how is the money being held by the seller’s solicitor (SCPC 3.2.2)
o Ensure deposit is held by the BUYER’S SOLICITORS as stakeholder instead of SELLER holding
it as agent because
If held as agent – VAT is payable on deposit AT EXCHANGE
If held as stakeholder – VAT is only payable AT COMPLETION
• VAT position
o Buyer needs to make enquiries of the seller about their VAT position and get then to
warrant they won’t change it after exchange if contracts
o Key point: If the contract is silent on VAT, the default position is that the transaction is a
standard-rated supply and the buyer will pay VAT in additional to the purchase price – SCPC
2.1 &2.2
• Insurance/Risk – who bears risk of insuring property?
o Usual position: risk passes to buyer in exchange – SCPC 8.1
o Exception: for properties sold subject to leases, the seller is responsible for insuring the
property – SCPC 8.2.2 & 8.2.3
• Property Definition – check it matches property outlined in title plan
o If it doesn’t, you can fix contract by attaching title plan,
• Is the property sold with vacant possession or subject to existing leases?
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