A lease is an interest in land and therefore Stamp Duty Land Tax (SDLT) is payable. For all leases of seven years or more (with a chargeable consideration over £40,000 or, rent over £1,000), SDLT must be paid, and it is the responsibility of the tenant to make that payment. It must be paid within 14 days from completion, which is known as the effective date. Leases for under seven years require payment of SDLT only if it has a chargeable consideration over the zero-rate threshold.
Premium and NPV
The amount of SDLT depends upon the value of the commercial lease.
The rates for rent are:
- Up to £150,000 there is no SDLT liability
- Between £150,001 and £5,000,000 is liable at a rate of 1%
- Above £5,000,001 there is an SDLT rate of 2%
The rates for premium are:
- £150,000 or less = 0%
- £150,001 – £250,000 = 2%
- Over £250,000 = 5%
Consideration given for the grant of the lease is considered premium and so will any other payments made before the lease is granted. What types of these payments would constitute chargeable consideration? The answer is assets paid for that form part of the land or property. For example, the building and structure, the fittings and fixtures, the goodwill attached to the land and so on. Things that do not constitute chargeable consideration include, tenant covenants to maintain and repair, service charges, reverse premia etc.
You will need to know the Net Present Value (NPV) of the rent, to calculate this we will need to put together:
- The rent, including VAT if applicable
- The length of the lease
The value of the first five years’ rent is used to calculate the NPV. Should the lease extend beyond five years, then the highest yearly amount paid during the initial five years is used to calculate the NPV for those successive years. If rent cannot be determined, then you should make a reasonable estimate for each year. This amount should be reviewed and recalculated towards the end of the five-year period and if the revised amount is more than what was paid, payment for the remaining amount should be made within 14 days of the review date.
SDLT is calculated using both the NPV and the premium payable. If you wish to calculate your tax, HMRC has an online SDLT calculator for this.
Agreement for lease
If there is an agreement for lease in place and the tenant takes occupation of the property during the period of the agreement and therefore before the start date of the lease, then the effective date changes from the date of completion to the date the tenant takes occupation. The tenant will then be required to pay SDLT earlier.
As mentioned above, an assignment or an agreement that has been performed will be considered a separate transaction. If otherwise (occupation has not been taken early under the agreement) then the agreement is treated as being originally made by the assignee and consideration for the contract and the assignment will be calculated together.
Assignment of lease
An assignment of a lease is treated the same as a transfer of freehold interest and will have the same rules and rates applied as above. Any obligation regarding SDLT from the previous tenant will be passed on to the incoming tenant.
However, if a relief was applied when the lease was first granted and the assignment does not also benefit from it, then the transaction is treated as a grant of a new lease instead.
Surrender of lease
Where there is a premium payable by the landlord to the tenant for a surrender of lease, this land transaction will be subject to SDLT.
However, if a new lease is granted to the same party in consideration for the surrender of the existing lease, neither the surrender nor the grant of a new lease will count as chargeable consideration. Overlapping relief regarding rent can apply so long as certain conditions are met.
Variation of lease
Which variations will be treated as a grant of a new lease? A variation that takes effect as a surrender and re-grant, if the terms of the lease of the area of the property is extended and if the rent increases within the first five years outside the terms of the lease.
Which variation will be treated as the tenant acquiring a more valuable interest in land? The amount of rent payable is reduced, or the lease is varied for chargeable consideration.
Which variation will be treated as the landlord acquiring a more valuable interest in land? The term if the lease is reduced.
Please note that this blog is not intended to be tax or legal advice. This material has been prepared for informational purposes only and as general guidance. Is not intended to provide, nor should it be relied on for, tax or legal advice. You should consult your own tax advisors or seek your own professional independent advice before engaging in any transaction.
We can submit your SDLT payments for you when we are acting on your behalf for a lease to find out more call us today, on 0121 268 3208 or send us an email at firstname.lastname@example.org with your query and we will get back to you.