Stamp Duty Land Tax (“SDLT”) is a tax payable on certain UK land transactions. It is a common misconception that SDLT is only payable on purchases of freehold properties. SDLT is actually payable in respect of many different transactions involving the transfer of interests in land, including the grants or assignments of leases.
For leasehold property, it is the tenant’s responsibility to calculate and pay any tax due and in respect of any notifiable transactions they must submit a land transaction return to HMRC within 30 days of the effective date of the transaction. Failure to submit a SDLT Return and pay any duty due within the timeframe can result in penalties and interest being incurred.
The SDLT calculation
The calculation of SDLT on the grant of a new commercial lease depends on the length of the lease, the premium paid (if any) and the rent payable under the lease. HMRC have a SDLT calculator on their website to calculate the potential liability.
In simple terms, the shorter the lease term and the lower the rent, the less SDLT liability will be due. However granting short leases will not avoid SDLT as HMRC will treat a renewal lease as “linked” with the original lease if, for example, the rent was fixed under the terms of the original lease or is stated to be the same as that payable under the original lease. When the Revenue does treat leases as linked, it will charge SDLT on the aggregate of the rent and term.
The SDLT Return
All leases which generate a SDLT liability require the submission of a SDLT Return to HMRC. In addition, leases granted for a period exceeding 7 years always require the submission of a return, regardless of whether there is any duty due. Some leases do not require a return i.e. if the term is short and the rent is low. Guidance should always be sought from HMRC or your solicitor as to whether a SDLT Return is required.
Potential Further Liability
There are a number of circumstances during the actual term of a lease when SDLT may become payable again. For example:
The SDLT payable on a lease is calculated by reference to the first 5 years’ rent. If you have a rent review within the first five years and the new rent amount was not known at the grant of the lease then an additional SDLT Return needs to be filed with an additional SDLT payment, once the revised rent is determined.
In addition, rent reviews which occur after the first 5 years of a lease may also require an additional SDLT Return if it has been deemed to be an abnormal increase in rent. This situation can arise if the rent has been kept artificially low for the initial period in order to reduce SDLT. However, this could also arise if an unlucky tenant is given a large uplift in rent upon review.
If an original lease term expires, but the tenant remains in occupation of the premises, then this is deemed to be “holding over”. Once the lease continues after its contractual expiry date then it is treated as if the original term of the lease has been extended by one year. If SDLT was paid at the outset of a lease, or if the additional year takes the lease over the SDLT threshold, then a further SDLT payment will be required and a SDLT Return will need to be filed with HMRC. For each subsequent year that the lease is “held over” an additional SDLT Return needs to be filed (and tax paid, as appropriate).
Renewal leases have the same SDLT implications as normal leases.
Breaking a Lease
Those tenants who are considering ending their lease earlier than the contractual term should be aware of the consequence in relation to SDLT that has already been paid. Despite having paid SDLT for the full lease term, tenants will not be entitled to get any money back from HMRC for the remaining term.
If you require any advice in relation to the rules surrounding SDLT, please do not hesitate to contact our Commercial Property Department on 0116 289 7000.
Bhav Mistry, Trainee Solicitor