Stamp Duty Land Tax on Commercial Leases
The grant of a commercial lease may give rise to liability for Stamp Duty Land Tax (SDLT) – a fact which is often overlooked. Whilst many people associate Stamp Duty with buying a house, it also applies to business tenants renting property. Failure to accurately calculate and submit a stamp duty land tax return to HMRC, and pay any tax due, within the 14-day period allowed can lead to automatic financial penalties and interest.
Unlike buying a property, when SDLT is based on the total purchase price, liability arising from a commercial lease is based primarily on two things:
- Rent – the total amount of rent a tenant will pay over the entire life of the lease.
- Premium – any upfront, one-off cash payment a tenant makes to the landlord to secure the lease.
The amount of SDLT payable, if any, is determined by a formula that takes into account the term of the lease, the rent payable and whether VAT is payable on the rent. The resulting Net Present Value (NPV) is used to determine the SDLT payable.
SDLT will only be payable if the NPV is above £150,000. If the NPV falls below that amount, no tax is due but a tenant will still need to file a return if the lease is granted for a term of seven years or more, unless the chargeable consideration is less than £40,000.
SDLT is applied using a tiered system, with a rate of 1% applied to any NPV between £150,001 and £5,000,000 and a rate of 2% applied to any NPV above £5,000,000.
If the rents payable over the term of the lease cannot be ascertained when the SDLT return is submitted to HMRC, for example because of a rent review or turnover rents, an estimate of the amounts payable during the first five years of the term should be provided. When actual rents payable have been determined, and for any rent increases determined after the first five years of the term, HMRC should be notified and any shortfall in SDLT paid.
