PROPERTY TRANSFER - 07.07.2020

Gift of property to spouse: the VAT consequences

Option to tax

An option to tax election on land or buildings applies to all income earned from that property, including rent and its future sale or transfer. There is an exception for residential parts of the building, and use by charities in some cases. Once made, an election cannot be revoked for 20 years.

Tip. Before considering a property transfer in this situation, you should check if the 20-year limit has passed and you can revoke your option with HMRC. This means that all income and future deals will be exempt from VAT again, including the transfer to you and your spouse.

Legal entity

By gifting 50% of the property to your spouse, you are transferring the property from a sole trader to a partnership. This is a supply for VAT purposes. HMRC always treats jointly owned property as a partnership. However, there is a way of avoiding a potential VAT charge on the market value of the property with the transfer of a going concern (TOGC) rules, i.e. the transfer of a property rental business is taking place because a tenant is occupying the building.

Trap. Be aware that the TOGC rules are compulsory. If the conditions of a TOGC are met, then it would be wrong for the seller to account for VAT.

TOGC rules

To avoid an output tax problem, the partnership must do three things:

• register for VAT before the transfer takes place
• opt to tax the property with HMRC as well, i.e. complete and submit FormVAT1614A . This starts a new 20-year cycle before it can be revoked
• give written confirmation to the seller that the election, once made, will not be disapplied. This is an anti-avoidance measure.

Tip. For ease of administration, the partnership could keep the sole trader’s VAT number, with all parties completing FormVAT68 as part of the registration process.

Trap. The downside of the VAT68 procedure is that the buyer takes over the potential VAT liabilities of the seller, e.g. errors on returns for the last four years. It is often better for you to start with a fresh VAT number.

For detailed commentary on the TOGC rules, visit http://tipsandadvice-vat.co.uk/download (VA 10.09.03).

Capital goods scheme

If you purchased the property within the previous ten years for more than £250,000 excluding VAT being charged VAT on the purchase price, or you have spent this amount or more on any specific refurbishment, improvement or extension project, the input tax you claimed is subject to annual adjustments over a ten-year period with the capital goods scheme (CGS). These adjustments reflect any change in the use of the building between exempt and taxable supplies. As a quirk of the TOGC rules, the buyer takes over any remaining intervals of the seller as far as the CGS is concerned.

Tip. As long as all income generated by the building is taxable for the remaining adjustment periods, the CGS adjustments for the partnership will be nil. It is only if the building generates exempt income that a problem will arise.