Zero-rating the sale or grant of a long lease in a new building

By Tolley

The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Zero-rating the sale or grant of a long lease in a new building
  • The basic conditions
  • TOGC
  • Land
  • Mixed site developments

This guidance note provides an overview of when the sale of the freehold interest or the grant of a long leasehold interest can be zero-rated. It should be read in conjunction with the following guidance notes:

HMRC Notice 708 ; VCONST03000; VATA 1994, Sch 8, Group 5
  • Summary of the VAT liability of construction services
  • Definition of dwelling, relevant residential and relevant charitable purpose
  • Overview of VAT and property issues
  • Supplies liable to VAT at the standard rate

VATA 1994, Sch 8, Group 5, Item 1

The basic conditions

The supply can only be zero-rated if all of these conditions are satisfied:

Condition 1 – it must be an eligible property

The new building must be one of the following:

  • eligible dwelling
  • building that will be used for solely relevant residential purposes
Condition 2 – there must be a sale or grant of a long lease

The sale, assignment or surrender of the following:

VATA 1994, s 96; VCONST03200; VATA 1994, Sch 8, Group 5, Note 1
  • the freehold
  • a lease for a period exceeding 21 years (20 years in Scotland)

If the business intends to sell or grant a long lease in the property, but it becomes necessary to grant a short lease whilst a prospective purchaser is identified, the grant of the short-term lease will be exempt from VAT. The business will be required to adjust the amount of VAT claimed on costs associated with

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