Stamp Duty Land Tax (SDLT) must be paid on land transactions in England, including commercial leases over a certain threshold. SDLT may be payable on the grant, assignment, variation or surrender of a commercial lease.
The rules surrounding SDLT are complex and it is the tenant’s responsibility to calculate and pay any stamp duty on a commercial lease that is due to HMRC.
When Does Stamp Duty Land Tax Need To Be Paid?
SDLT must be paid within 30 days of the ‘effective date’ of the transaction. This can be the date the contract is completed, the move in date, the date of the first rent payment, or alternatively when ‘substantial performance’ of the transaction has occurred.
A certificate of SDLT will be issued by HMRC on receipt of the payment and this certificate may be required for the Land Registry before they can register the transaction.
If you are late in submitting an SDLT return to HMRC you will be subject to a flat-rate penalty of £100 that increases to £200 after three months. If your submission is more than 12 months late you will incur a tax-linked penalty up to the full amount of SDLT due. Unpaid SDLT will also accrue interest after 30 days and the current rate of interest is 3%.
Do I need to complete a return if no Stamp Duty Land Tax is due?
In some circumstances a return must be sent even if no SDLT is due:
- If the lease term is less than 7 years and SDLT would have been due without a relief.
- If the lease term of the lease is 7 years or more and either the chargeable consideration excluding rent is £40,000 or more, the average annual rent is £1,000 or more, or SDLT would have been due without a relief.
How Is Stamp Duty Land Tax calculated on commercial leases?
Calculating SDLT can be an involved process as it is payable on ‘chargeable consideration’. This includes both the money and ‘money’s worth’. It can also include the release or transfer of a debt. Any VAT payable on the transaction is also regarded as chargeable consideration.
SDLT on commercial leases is calculated based on the lease term, any premium paid and the rent payable.
The calculation is complicated further by SDLT also being charged on other payments and chargeable considerations including obligations to perform work or services on a property.
Freehold transfers and lease premiums
On freehold transfers and lease premiums the SDLT rates are:
Up to £150,000 – 0%
The portion from £150,000 – £250,000 – 2%
Anything over £250,000 – 5%
SDLT is charged on the net present value (NPV) of rent payable over the lease term and if VAT is payable on the rent you will need to include this in your calculations. The NPV is intended to be an estimate of the current value of the total rent that will be paid over the term. If the lease term exceeds 5 years the NPV will be based on the rent payable for each of the first 5 years and then for the remainder is taken to be the highest rent payable of any 12 month period during those first five years. No account is take in this initial calculation of any rent increases or reductions after the first five years of the term.
The SDLT rates chargeable on NPV are:
£0 to £150,000 – 0%
The portion from £150,001 to £5m – 1%
Anything above £5m – 2%
In general a shorter term and lower rent will mean less SDLT is due, however, a succession of short leases will not avoid SDLT as HMRC may view these as linked leases. If transactions are a single scheme, arrangement or series of transactions between the same parties or connected parties they will be viewed to be linked. HMRC will charge the lease holder SDLT on an aggregate of the term and rent for linked leases to prevent transactions being split to take advantage of lower or nil SDLT rates.
If a lease has an indefinite term it will be treated as a lease with a fixed term of one year. At the end of the first year the lease will be deemed to grow by one year and the SDLT calculation will need to be reviewed with every year of growth.
What happens if there is an agreement for lease?
SDLT may be payable before a lease is granted if an agreement for lease is substantially performed. Substantial performance could be deemed as a tenant paying rent, paying a substantial proportion of any non-rental consideration that is due or taking possession of the property.
As soon as this agreement for lease has been substantially performed, a notional lease will be viewed as granted. In terms of SDLT the notional lease and the actual lease will be treated as one lease commencing on the date of substantial performance and ending on the expiry date of the actual lease.
Unless the terms of the actual lease are different to the notional agreement for lease there should be no additional SDLT payments needed when the actual lease is granted. If an agreement for lease is not substantially performed there will be no SDLT obligations and SDLT should be calculated when the actual lease is granted.
Does Stamp Duty Land Tax only need to be paid at the start of the lease?
You may need to make further SDLT payments during the term of your lease.
When the initial SDLT is calculated it is based on the first five years’ rent. If your lease includes a rent review within the first five years and a new rent is agreed you will need to file an additional SDLT payment to cover the revised rent. In some circumstances rent reviews that occur after the first five years may also incur SDLT if it has been deemed an abnormal increase. This situation can occur when rent has been kept artificially low for the initial period in an attempt to reduce SDLT.
If a lease expires but the tenant remains in occupation of the premises this is known as ‘holding over’. Any lease that continues after its expiry is treated as if the original lease has extended for a year. If SDLT was paid at the commencement of the lease, or if the lease has been taken over the SDLT threshold with this additional year an SDLT Return and additional payment must be made to HMRC.
Renewal leases are subject to the same SDLT rules as normal leases.
Breaking a lease
Tenants who are considering breaking their lease should be aware they will not be entitled to receive a SDLT refund from HMRC for the remainder of their lease term.
Do you have a question about Stamp Duty on a Commercial Lease?
The legal obligations regarding stamp duty on a commercial lease can be difficult to navigate and many inexperienced tenants find themselves liable to penalties for incorrect or overdue payments and accruing unnecessary interest. A legal professional can help you calculate your SDLT and complete the land transaction return in an efficient and cost-effective manner.