Stamp duty on new leases
Warning
If you buy or rent a property, you may be liable to pay Stamp Duty Land Tax or 'SDLT' which is a tax on property transactions. SDLT replaces the old stamp duty. The lessee or tenant paus SDLT on the premium he pays (if any) and on the rents he will be paying under a new lease.
Stamp duty land tax is complicated. So read this only as an introductory guide. You cannot take it as advice on what to do or which will happen in any real life situation. There are exceptions to almost everything. There are anti-avoidance provisions in the legislation to catch many schemes to get round SDLT. There are many issues and subjects we cannot even touch on here. Always get expert advice from a qualified accountant or solicitor.
Even a property transfer for no payment or a small payment can attract SDLT on the full value of a property. At a top rate of 4% that can be very serious. So always consider the SDLT implications of a lease or purchase.
SDLT on the premium
The ‘premium’ is any lump sum the tenant pays – a purchase price by another name. The rate payable on the premium depends on the amount of rent.
If the rent is £600 a year or less, then the rates on the premium / purchase price are as for purchase prices.
Purchase price SDLT payable
£150,000 or less nil
£150,001 - £250,000 1% of the purchase price
£250,000 - £500,000 3% of the purchase price
£500,001 or more 4% of the purchase price
If the rent is more than £600 a year, then – unlike purchase prices – the exemption from SDLT on a premium up to £150,000 does not apply and instead:
• 1% is charged on a premium of £250,000 or less.
• 3% is charged on a premium of between £250,001 - £500,000
• 4% is charged on a premium of £500,001 or more
SDLT on the rent
The SDLT payable on the rent depends on the net present value (NPV) of the rent payable throughout the lease term. You calculate this NPV by multiplying the annual rent by the number of years in the term, and discounting the result by the current Treasury Discount Rate. The current Treasury Discount Rate is 3.5%. You can work out the NPV by using the NPV function on a Microsoft Excel spreadsheet, or by using the lease tax calculator on the Inland Revenue website. Essentially you are calculating what purchase price would be paid now to buy the right to receive the rents payable over the life of the lease.
There is no SDLT paid on NPV of £150,000 or less. If the NPV exceeds £150,000, SDLT is charged at 1% of the excess.
Where there is a premium as well as rent, you cannot have the £150,000 ‘tax-free’ band twice. If a premium is payable for the grant of the lease, but it is £150,000 or less, no SDLT is payable on it as a premium, as above. But you must then add the premium to the NPV and if the result is above £150,000, tax is chargeable at 1% on the excess over the tax-free band.
Please note the following points about calculating the correct number of years to use in the formula.
- Ignore break options or rights to extend the lease term.
- If the term is not certain, or it is a tenancy at will the term is deemed to be one year.
- If the tenant is holding over, the term is deemed to be one year.
- For leases of 99 years or more, the term is taken to be 99 years.
If VAT is payable on rent, then you have to add the VAT to the rent before doing the NPV calculation. In other words, you pay SDLT on VAT. Click here to see when VAT is payable. Where service charge is calculated separately from rent in the lease, only the rent is used in the NPV calculation. But where a single figure is payable without splitting it between rent and service charge, the whole amount has to be treated as rent in the NPV calculation.
More SDLT at rent review. A rent review may trigger a further payment of SDLT. If the rent review results in the rent increasing by more than 5% plus the Retail Prices Index over the period, SDLT has to be paid again. SDLT works differently from the old stamp duty, which was payable only on the deed of transfer or lease. Now it is the transaction which causes SDLT to be payable, and that can include an agreement for lease if substantial performance is under the agreement. Surrenders of leases, where a premium is paid, are also taxable.
Other options
No SDLT on buying companies
If instead of buying a property, you buy the shares in a company which owns the property, the stamp duty on the shares may be 0.5%. For this to work a number of conditions have to be met. You can't just stick a property in a company and sell the company. So you must get expert advice on the particular circumstances of the case. But obviously it is well worth exploring as a buyer whether you can pay .5% instead of 4%. It can also benefit a seller who can negotiate to split the saving with his buyer.
No SDLT on fixtures and fittings
You only pay SDLT on property. So you can legitimately split the price between the property and any fixtures and equipment to lower the overall SDLT or to bring the price below one of the lower rate bands. You can only allocate a reasonable price to the fixtures and fittings. They have to be things which are easily and obviously portable and which are not permanently fixed to the land or buildings. It may have to be justified to the Inland Revenue later, if they take issue on any apportionment.
Exemptions
There are exemptions from SDLT for some transfers of property: e.g. the initial transfer of assets to a limited liability partnership, and transfers between public bodies.