What is the VAT situation when a freehold building is sold, comprising a retail ground floor, with a long-lease residential unit above?

Usually, such transactions will be exempt supplies. But, the option to tax can cause major complications:

• option to tax has been exercised: if the occupier of the flat is using the flat as a dwelling, then the supply of the shop will be taxable, but the supply of the flat will be exempt. However, if the occupier of the flat is not using it as a dwelling, but for some commercial use, then the option to tax will mean the supply of the whole property will be taxable;
• option to tax has not been exercised: normally, the sale of both the shop and flat will be exempt supplies.

Bear in mind that additional complications will arise if the sale is the transfer of a going concern. Source: www.practicallaw.com (subscription service).