Stamp Duty Land Tax: the tenant’s ongoing obligations

Commercial Property Partner Hannah Bambury discusses the Stamp Duty Land Tax (SDLT) in relation to commercial tenants.

Following our note on Stamp Duty Land Tax (SDLT) found here this article concentrates on SDLT with respect to leases and holding over (a tenant continuing in occupation after a lease has ended). 

SDLT in respect of a lease is not straightforward for a tenant. Once the lease is completed, the documents copied and filed, solicitor’s invoices settled and SDLT paid a Tenant could be forgiven for thinking that the SDLT liability is not something they have to revisit. Think again – tax doesn’t have to be taxing, but HMRC have tried their best. 

Does this apply to me?

If you are:

  • a commercial tenant; 
  • you are occupying under a short term/high rent lease; or
  • holding over; or  
  • you have a periodic tenancy; 

then it is in your interests to check if further SDLT is due. If your lease was granted after 10 July 2003 generally the SDLT rules will apply with few exceptions. Most extensions of the tenant’s time in occupation of the property will require a review of the SDLT position. SDLT is a self-assessed tax and failure to pay the correct tax on time will incur penalties. 

The SDLT rules are complex and this article is not a substitute for professional advice. If you do have any questions on the scenarios below we would be very happy to assist you.

Short lease, high rent

If a tenant chooses to take the grant of a new lease, for one or two years for example at a high rent (do not forget to add VAT if the landlord has opted to tax the property) the Net Present Value (NPV) of the lease could be only just below the level at which an SDLT payment is incurred. At time of writing this NPV level is about £150,000 – the calculations behind the same are beyond the scope of this note. If the tenant then stays on over the initial term SDLT may be due as the NPV will have increased. Failure to pay within the 14 days of the SDLT trigger date will incur penalties. 

Summary If the lease term is short and the rent high no SDLT may have been payable initially, but if the tenant continues in occupation SDLT may be payable.

Longer leases

Generally longer leases at market rent tend to trigger an SDLT payment. This payment does not preclude further payments should the tenancy continue. The SDLT should be recalculated if the tenant plans on holding over. 

The lease term and trigger dates

Depending on the lease the tenant’s liability and trigger date differs. This is based on the type of tenancy as below:

  1. A periodic tenancy – where a tenancy continues automatically until terminated by one of the parties. Points to note with respect to a periodic tenancy – 
  2. Assuming an initial periodic tenancy period is for less than a year the lease will be taxed, for SDLT purposes, as being for a 1 year term (the SDLT period). 
  3. The SDLT will be payable 14 days after the “Effective Date” (either completion of the lease – or substantial performance). 
  4. As soon as the tenant’s occupation exceeds a year then SDLT is payable within 14 days of the expiry of the previous year’s term. 

An example of how the above might operate – although this is not definitive and will depend on the facts of each matter: 

  • a periodic tenancy is granted on 1st January 2020 for an initial 6 months, thereafter terminable on 2 months’ notice 
  • if any SDLT is due it is payable within 14 days of that date on a hypothetical term of 12 months 
  • On 31 December 2020 that “SDLT period” (see point 1(a) above) expires 
  • If the tenant remains even for a few days under the terms of the periodic tenancy then SDLT is due, within 14 days of 1 January 2021 on a hypothetical term of 24 months

Previous SDLT payments are deducted from further SDLT liability, but the lease is now taxed as a 2 year lease and the tenant pays up front. No refunds are available if the tenancy ends within that 2nd year. The same principle applies to longer periodic terms as well; the SDLT being applied to the cumulative term – rounded up. This is not a tenant friendly position.

  1. A fixed term tenancy – where there is an end date specified in the lease. If the tenancy is for a fixed term and the tenant says on past that end date (holding over) a different approach is taken. The overall lease term liable for SDLT is extended by a year, additional SDLT may be payable on the new aggregate term but the SDLT is due at the end of the additional year. If the tenant terminates before the end of the year the SDLT is calculated only up to that termination date. 

This is a more tenant friendly position in terms of cash flow and potential SDLT liability.

SDLT, Leases and linked transactions

There are further complex rules regarding SDLT due on a lease renewal that could be deemed “linked”. This is out of the scope of this note.

Summary

If you are a tenant and are remaining in occupation of your leasehold property past the lease term then you may need to make an additional SDLT return. If your initial lease triggered an SDLT payment it is highly likely that an additional SDLT payment will be necessary. SDLT is a self-assessed tax and there are penalties for non-payment.

As above this article is not a substitute for professional advice, therefore please contact us regarding any queries you may have regarding the topics covered.  

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