With a large number of empty commercial properties currently available, a charity can hope to purchase a building for its use at a competitive price
However, forgetting to consider the tax implications can easily wipe out any potential savings.
There is no blanket exemption from tax when a charity buys a property. The normal tax rules that apply to every person apply to charities but with certain exceptions. So the two main areas to consider are VAT and stamp duty land tax (SDLT).
Given that most charities are likely to only be able to recover a small proportion (if any) of any VAT incurred and that there is no reclaim mechanism for SDLT, any such liabilities will represent an absolute cost.
If, as is likely, the current owner of the property has made an option to tax then the starting point is that VAT at 20% on top of the purchase price will be payable by the charity.
However, there are a few options for mitigating this charge. Firstly, if the charity is comfortable that it will only be using the building for 'relevant charitable purposes' then it can serve a certificate on the current owner disapplying the option to tax.
However, depending on the current owner's own tax position, this can lead to the current owner having to pay back VAT that it has already reclaimed, or being unable to recover VAT it has already incurred; how great an issue this could become will depend on the current owner's particular circumstances, so it is certainly something worth exploring.
The issue with this route from a charity's perspective is that a charity may not want to be bound by having to use the property for 'relevant charitable purposes' (although there is a 5% de minimis which may be of use). Charities may want, for example, to hire out the property at times when they are not using it. Hiring the building out does not automatically fall outside of 'relevant charitable purposes' but it is an area that needs careful consideration by the charity before proceeding.
An alternative, if the current owner has only recently made an option to tax, is to see if the current owner is still within the six-month window and the appropriate conditions to allow the option to tax to be revoked. This would still potentially leave the irrecoverable VAT issue for the current owner referred to above, but it would mean that the charity is not bound by the 'relevant charitable purposes' restriction.
A further alternative if the property is held by the current owner via an SPV is for the charity to consider purchasing the SPV with a lease, then put in place between the SPV and the charity. This would avoid the charity paying VAT up-front (as no VAT is payable on the purchase of shares) but it is likely that the charity would have to pay VAT on a market rent under the lease and there are a number of considerations to ensure that such tax planning would not be seen by HM Revenue & Customs as abusive.
There is an exemption from SDLT which charities can usually take advantage of. Again there are a number of conditions that need to be met but, broadly, property used either in furthering the charity's charitable purposes or as an investment, the profits of which are used for such purposes, should qualify. Charities should be aware that there is a three-year period under which the relief can be clawed-back should things change.
Often a property once purchased will require work to make it fit for the charity's use. If the works are sufficiently extensive and various conditions are met the charity can also avoid paying VAT on the cost of such works. A detailed consideration of these rules is outside the scope of this article.
The opportunity for a charity to purchase a commercial property in the current market at a competitive price can be one worth pursuing. However, any apparent up-front saving can easily be outweighed by an unexpected tax liability, so any charity considering such a purchase should take appropriate tax advice at an early stage.