Whilst most people are well aware that Stamp Duty Land Tax (SDLT) will be payable on the acquisition of a property, the payment of SDLT on the grant of a new lease, and in particular the amount due, often comes as a surprise. This article attempts to serve as a reminder of the SDLT basics on leasehold transactions and of the penalties that may become payable in the event that a payment becomes overdue.
Stamp Duty Land Tax is a compulsory tax affecting UK land transactions regardless of how or where the relevant transfer instrument is executed.
As a general rule the entering into of a lease for a term of 7 years or more at an annual rent in excess of £1,000 will require a Land Transaction Return (Return) to be submitted to HM Revenue and Customs (HMRC).
The submission of the Return and the payment of SDLT will fall due when the transaction involving the leasehold interest is ‘substantially performed’, being the earliest of the following:
- when payment of all or substantially all of the non-rental consideration is made; or
- when the purchaser obtains keys to the door and takes possession of the property; or
- when payment of any rent is made.
This date may be before the date that the lease is actually completed.
How much SDLT is payable on the grant of a lease of commercial property?
SDLT is payable on both the annual rent payable pursuant to the lease and upon any premium paid for the grant of the lease.
When calculating the SDLT due in respect of the annual rent, account is taken not only of the annual rent payable during the first five years of the lease but also any VAT payable on that rent. SDLT is not however payable on service charge or any other rates or outgoings even if they are reserved as additional rent. Account is taken of any rent free periods during the first five years of the lease where these are set out in the lease.
SDLT is chargeable at 1% of the Net Present Value (NPV) of the total rent payable over the term of the lease. A NPV of less than £150,000 will not attract a charge to SDLT. The NPV is calculated by reference to a formula which is not straightforward. However, HMRC has helpfully created an ‘SDLT Calculator’ on its website which will calculate the amount payable.
In the event a premium is payable on the acquisition of a new lease in addition to annual rent and the annual rent is over £1,000 per annum, SDLT will also be payable on the premium at a rate of at least 1% depending on the level of the premium payable. The HMRC calculator will also take account of this.
The need for additional returns
It should also be noted that a further Return may need to be submitted to HMRC and additional SDLT paid where there is an increase in rent within the first 5 years of the term of the lease and where the increase in rent was not quantifiable when the original Return was submitted. This obligation is often overlooked and can lead to penalties for unsuspecting purchasers or assignees of leasehold interests. Where appropriate, enquiries should be made of a seller or assignor as part of the due diligence process.
HMRC are not so keen to return “overpayments” of SDLT however and in the event that a lease is terminated prior to the expiry of the contractual term for whatever reason, for example pursuant to a break right, as a result of forfeiture by the landlord or consequential upon damage by either an insured or uninsured risk , there will be no refund of the SDLT previously paid.
An additional Return and SDLT may also be required if a lease is varied so as to extend the term or demise of the lease as this has the effect of surrendering and re-granting the lease for SDLT purposes. Relief will be available but only in relation to those leases within the SDLT regime and not earlier leases on which Stamp Duty was paid. Consideration should be given in those circumstances to leaving the old lease in place and to granting a new lease for the additional term or demise.
‘Holding Over’ – remaining in occupation
Many occupiers are unaware that if they remain in occupation after the end of the term of a lease on which SDLT was been paid, as opposed to Stamp Duty where there are no SDLT implications, or where an SDLT liability has been triggered during the term on a lease within the SDLT regime, perhaps as a result of a rent review, they may be subject to a new SDLT charge. In these cases, the NPV must be recalculated and a Return submitted at the beginning of every year of holding over until the new lease is either formally granted or the lease is properly terminated.
Entering into a renewal lease?
On completion of a renewal lease, where SDLT was payable on the original lease rather than Stamp Duty, the term of the new lease will be treated for SDLT purposes as starting on the term commencement date rather than the date upon which the new lease is completed. Overlap relief will be available.
If a Return is not delivered and payment of SDLT not made within 30 days after the date of completion of the lease a penalty and interest will be payable. The standard penalty fee for any payment made up to 3 months after the due date is £100 plus interest doubling to £200 plus interest thereafter. If a Return is not filed within 12 months of completion a taxed based penalty, which can be any amount up to the full amount of the SDLT due under the Return, as well as the fixed penalty is payable. Interest charged on late payments of SDLT is currently set at 3% of the SDLT payable and this starts to accumulate the day after the 30 day period ends. Consequently it is important to plan effectively and set aside the funds needed to meet this tax liability before completion takes place and ensure that these funds are received by HMRC in good time.
There are a large number of additional reliefs to assist and traps to catch tenants which have not been covered in this short article. Our Real Estate Department, in conjunction with our specialist Tax Department, are available to discuss the SDLT implications of any land transaction with you.