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Q: My fully taxable VAT registered trading company client wants to transfer its business premises to its newly formed holding company that will rent the property back to it. The property was bought 5 years ago for £250k + VAT which the client recovered in full. It has not opted to tax (OTT). Does it have to charge VAT to on the sale?

A: Since the property is not opted by TradeCo and is over 3 years old, the freehold sale from TradeCo to HoldCo will be a VAT exempt supply. As such, any VAT incurred wholly in relation to this sale (e.g. legal fees etc.) will be directly attributable to this exempt sale and irrecoverable subject to PE deminimis limits. TradeCo would be disposing of a Capital Goods Scheme (CGS) item halfway through its 10-year interval period so would need to repay circa 50% (depending on exact timings) of the originally recovered VAT because of this sale being exempt. To avoid this, HoldCo could VAT register and both it and TradeCo OTT the property; TradeCo would then charge VAT on the sale to HoldCo, HoldCo would recover this and HoldCo would charge VAT on the rent to TradeCo. Alternatively, they could look at forming a VAT group before transferring the property.

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