Stamp Duty on Commercial & Non-Residential Property

stamp duty

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Stamp Duty Land Tax (SDLT) can make a significant difference to the overall costs when buying non-residential land and property, so it is important to understand the rules around when this levy is applied, the commercial SDLT rates and how this is calculated.

In this guide for buyers, we explain the rules on stamp duty on commercial property.

What is stamp duty on commercial property?

You must pay Stamp Duty Land Tax (SDLT) if you decide to buy commercial property over a certain price in England and Northern Ireland. This is a form of property transaction tax to be paid on any commercial property purchased at over the existing nil-rate band. However, wherever you decide to buy non-residential property in the UK, you will have to pay a levy, but it has just different names. In Wales, you will pay what is known as Land Transaction Tax (LTT), while in Scotland the levy is described as Land and Buildings Transaction Tax (LBTT).

Stamp duty on commercial property applies to any non-residential land and property. The label ‘non-residential’ might sound simple, but for UK tax purposes it is wider-ranging than simply land and property that is not lived in. It includes shops, offices and work units, as well as mixed use properties.

A mixed-use property is one with both residential and non-residential elements, for example, a flat connected to a shop or office.

Commercial SDLT also applies to six or more residential properties bought in a single transaction; property that is not suitable to reside in; any other land or property that is not part of a dwelling’s garden or grounds; agricultural land that is part of a working farm or used for agricultural reasons, unless sold as part of a dwelling, such as a cottage with fields; as well as forests.

How much is stamp duty on commercial property?

The stamp duty on commercial property will depend on the relevant threshold at the time the property is purchased. The threshold is where stamp duty on commercial property starts to apply. If you buy non-residential land or property for less than the threshold, there will be no SDLT to pay. The commercial SDLT threshold, also known as the nil-rate band, is currently set at £150,000, where any property purchase below this band will not attract an SDLT liability.

If you buy a commercial property for anything above £150,000, you will have to pay stamp duty on increasing portions of your purchase price. As with residential SDLT, stamp duty on non-residential land and property is charged at different rates on the portion of the total price falling within each rate band, rather than a single percentage rate of the price paid.

Equally, stamp duty on commercial property applies to land and property bought on both a freehold or leasehold basis. However, the SDLT rules become more complex for new rather than existing leases, where the amount of stamp duty payable must be calculated based on variables such as the length of the lease term, the annual rent and lease premium.

What are the current commercial SDLT rates?

If you are looking to buy a commercial property outright, on a freehold basis, or to buy an existing leasehold, you will need to apply the applicable commercial SDLT rates to the purchase price or lease premium. However, the SDLT threshold and commercial SDLT rates have not changed for several years, and are currently set as follows:

Purchase price or lease premium

SDLT rate

Up to £150,000 0%
The next £100,000 (the portion between £150,001 to £250,000) 2%
The remaining amount (the portion over £250,000) 5%

 

These rates apply to both freehold and existing leasehold non-residential and mixed use purchases and transfers. For the purchase of new commercial or mixed-use leaseholds, stamp duty will be payable on both the lease premium or purchase price, together with the net present value of the rent payable. The ‘net present value’ is based on the value of the total rent over the life of the lease. These two figures are calculated separately and then added together, where:

  • If the net present value is up to £150,000, zero SDLT is payable on this
  • If the net present value is above £150,000 and up to £5 million, 1% SDLT is payable on this
  • If the net present value is over £5 million, 2% SDLT is payable on this.

Whilst small businesses, requiring smaller premises, benefit from what is commonly known as the slice rather than the slab system, where stamp duty is paid on increasing portions of the purchase price above the nil-rate threshold, those in need of larger business premises will face the much higher rate of 5%. This means that consideration must always be given to the overall cost of a property, and which SDLT band this falls into, before proceeding with a purchase.

The amount of stamp duty payable can also vary depending on where in the UK you buy. Under the LTT regime in Wales, there is a much higher nil-rate threshold of £225,000, with a more preferential 1% rate for the portion between £225,000 to £250,000. In Scotland, under the LBTT rules, the nil-rate threshold of £150,000 is the same as for England and Northern Ireland, but again with a lower 1% rate for the portion from £150,001 to £250,000.

How is stamp duty on commercial property calculated?

How stamp duty on commercial property is calculated will depend on whether you are buying a property outright, on a freehold basis, or whether you are buying a leasehold. If buying on a leasehold basis, the calculation will then depend on whether you are being granted a new or replacement lease, or being assigned an existing lease.

For the purchase of a freehold commercial property, the calculation is straightforward. You will simply need to take the portion of any purchase price over and above the nil-rate band of £150,000, and apply the relevant commercial SDLT rates on the portion of the price falling within each rate band. For example, if you buy shop premises on a freehold basis on 1 October 2022, with a purchase price of £295,000, the total SDLT payable would be £4,250.

The calculation for this freehold purchase illustration is as follows:

  • For the portion of the purchase price up to £150,000, there will be zero SDLT to pay
  • For the portion between £150,001 to £250,000, there will be £2,000 to pay at 2%
  • For the portion above £250,000, there will be £2,250 to pay at 5%
    £2,000 + £2,250 = £4,250 in total payable.

When it comes to buying a new leasehold property, or a property on which you will be granted a new lease, the calculations become more complex. This is because you will need to factor in the lease premium or purchase price ‘and’ the net present value of the rent payable. However, HMRC provide a very useful online calculator. This will ask you for the basic relevant information relating to your proposed transaction, including:

  • Is your transaction freehold or leasehold?
  • Is the transaction residential or non-residential?
  • The effective date of your transaction, typically your completion date
  • The purchase price, referred to as the chargeable consideration, if buying freehold
  • The start and end dates shown in your lease, if buying leasehold, to calculate the lease term
  • The total lease premium payable, if buying leasehold
  • The annual rent due for the first 5 years, if buying leasehold.

What is the chargeable consideration for stamp duty purposes?

HMRC refers the total amount you use to work out the SDLT that you will be required to pay as the ‘chargeable consideration’. In most property transactions, you will pay money in exchange for the property or land, or for an interest in land. In a simple transaction, for example, for the purchase of freehold office premises, the total value you pay SDLT on, or the ‘chargeable consideration’, will usually be the price you pay for that property and any land it sits on.

However, how you decide what counts as the chargeable consideration can be more complicated for other transactions. This is because, in certain circumstances, this might include other forms of payment, where if you give something of value in exchange for either land or property, it will count towards the chargeable consideration. This can include things like goods, works or services, release from a debt or the transfer of a debt.

In some transactions, the purchaser may also pay some of the total price on transfer and the rest at an agreed later date. This is called ‘postponed consideration’. For example, where a business owner sells his premises to a colleague for £1 million, with a payment of £500,000 up front and a second payment of £500,000 in one year’s time, SDLT will still fall due on the full amount of £1 million. This will also become payable on completion, without any postponement or apportionment. There is no discount or postponement of any SDLT payable simply because there is an arrangement for a later payment of the purchase price.

There are certain circumstances in which SDLT can be deferred, but this is typically limited to where a transaction includes an amount that the buyer will only pay if some specific future event happens. This is known as ‘contingent consideration’. For example, if a developer agrees to pay an additional sum on condition that they get planning permission for redevelopment, SDLT will be payable on the assumption that the contingency will happen, but they can apply to defer payment of SDLT on the contingent amount.

Where a transaction includes a later payment which depends on an unknown variable, known as ‘uncertain or unascertained consideration’, such as future payments based on the turnover of a business, SDLT will be calculated on the basis of a ‘just and reasonable estimate’ of the amount involved. The buyer can either apply to defer payment of the unascertainable part or make an appropriate adjustment when the amount of consideration is certain.

How and when is stamp duty on commercial property paid?

You must submit your SDLT return to HMRC, and pay the tax due set out in that return, within 14 days of completion of the purchase of a commercial property. If you have a solicitor, agent or conveyancer, they will usually file your return and make the stamp duty payment on your behalf on the day of completion. They will then add the stamp duty to their fees. Alternatively, you can file a return and pay the tax yourself. You may be liable to pay a penalty and interest if you do not file your return and make your payment within the time required.

For most transactions under £150,000, you will still need to submit an SDLT return, even if there is no stamp duty to pay, unless the transaction is exempt, for example, you do not need to tell HMRC about a freehold purchase with a chargeable consideration of less than £40,000.

Can stamp duty on commercial property be avoided?

Avoiding stamp duty on commercial property is difficult, unless you can haggle the price to below the £150,000 threshold. You cannot usually use other forms of payment, other than cash, as their value will be included in the chargeable consideration. If the property is around the threshold level, or sitting between rate bands, one way of legitimately minimising any stamp duty payable is to pay for fixtures and fittings separately, although you should always seek specialist legal advice if you are looking to strike a deal like this. Depending on the value of those items this could be construed as a deliberate attempt to evade tax.

You may also be able to reduce the amount of tax you pay by claiming certain reliefs. For example, you may be eligible for SDLT reliefs for multiple dwellings, or as a company transferring property to another company. However, again, expert legal advice should be sought here. Importantly, you must still complete an SDLT return to claim any relief to which you may be entitled under the SDLT relief rules, even if no tax is due.

Finally, even where stamp duty cannot be avoided or discounted, it is worth reminding yourself that SDLT commercial rates are much lower than the rates for residential property, especially when buying a second home, so the bill may not be as high as first anticipated.

Commercial stamp duty land tax FAQs

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Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.

Author

Stamp Duty on Commercial & Non-Residential Property 1

Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.

Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing Agency for the Professional Services Sector.

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