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Out-Law Guide 8 min. read

Stamp Duty Land Tax on Commercial Property

03 Jan 2019, 9:40 am

What are the main characteristics of SDLT?

SDLT is payable on land transactions where the land is in England. Land transactions in Scotland are subject to Scottish Land and Buildings Transaction Tax (LBTT) and from 1 April 2018 transactions involving land in Wales are subject to Land Transaction Tax (LTT).

A 'land transaction' is any "acquisition of a chargeable interest". This is widely defined and can include the transfer of a freehold interest and the grant, assignment, variation or surrender of a lease as well as some other less common transactions.

Exempt interests are not subject to SDLT. These include a licence to use or occupy land and a tenancy at will. However, HM Revenue and Customs (HMRC) has a strict interpretation of what constitutes a licence or a tenancy at will.

When is it payable?

SDLT liability is triggered on the 'effective date' of the land transaction. SDLT must be paid within 14 days after this date in order to avoid interest and penalties. The effective date is usually either the date the contract is completed, or on substantial performance of a contract or an agreement for lease if earlier. For transactions where the effective date was before 1 March 2019, a 30 day time limit applies.

In the case of a lease, substantial performance is broadly the earliest of any rent payment being made, when 90% or more of any premium is paid and when the tenant or a connected person takes possession of the property.

In the case of a freehold, the effective date is usually the date the contract is completed. However the contract may be regarded as substantially performed if 90% or more of the consideration is paid, or if the purchaser takes possession of the property.

HMRC regards 'taking possession' to be when the tenant or purchaser obtains the keys and is entitled to occupy the property, however this is documented.

What is it charged on?

SDLT is payable on "chargeable consideration". This includes both the money and 'money's worth' which is given directly or indirectly by the purchaser or a connected person. It can also include the release or transfer of a debt. Any VAT payable in respect of the transaction is regarded as chargeable consideration. This means that, effectively, you pay SDLT on VAT.

In terms of leases, SDLT is payable on any premium and the rent and there are different rules for each. However SDLT can be payable in respect of other payments made under the lease, or on non-cash consideration such as agreeing to do building works.

Where a contingency affects the eventual amount of consideration that will ultimately be due, purchasers must calculate SDLT on the basis that the contingent amount will be payable. However an application to defer the SDLT payable on contingent amounts can be made in some circumstances.

Where the consideration is uncertain or has not yet been ascertained, purchasers must make a reasonable estimate of the final consideration as at the effective date of the transaction and pay SDLT on that basis. This could happen where, for example, the consideration is based on profits in accounts which have not yet been drawn up. Once the consideration becomes certain or ascertained a further land transaction return will need to be submitted to HMRC within 30 days and any additional SDLT paid or overpayment reclaimed.

What are the rates of SDLT?

On freehold transfers and lease premiums in respect of commercial property.

Remember that SDLT is payable on the VAT-inclusive amount. For the different thresholds and rates which apply to residential property, see the HMRC website .

In the case of rent, SDLT is charged on the net present value (NPV) of the rent payable over the term of the lease. If VAT is payable on the rent, you will have to include the VAT when calculating the NPV. HMRC provides a calculator on its website which will calculate both the NPV of rental payments and the SDLT charged on that rent.

Essentially, if the term of the lease exceeds five years, the NPV is calculated by reference to the actual rent payable for each of the first five years of the lease and then for the remainder of the term the rent is taken to be the highest rent payable in respect of any continuous 12-month period during the first five years of the term of the lease. No account is take in this initial calculation of any rent increases or reductions after the first five years of the term - whether set out in the lease or otherwise occurring.

The SDLT chargeable on the NPV amounts for commercial property is calculated using the following bands. Again, different thresholds apply for residential property.

If there is a rent review or variation provided for in the lease within the first five years of the term then the initial NPV calculation should take into account a reasonable estimate of the rent which will payable after this review or variation. The NPV will then be recalculated using the actual rent figures at the end of the fifth year of the term or once the rent for the first five years becomes certain, if that happens earlier. Again, the highest 12-month figure in the first five years is used for the NPV calculation for the period of the term after the first five years. If this recalculation results in more SDLT being due, the land transaction return has to be amended and the additional SDLT paid.

What about linked transactions?

If transactions are linked, the SDLT calculation is more complicated. Transactions will be 'linked' if they form a single scheme, arrangement or series of transactions between the same parties or connected persons. This will be the case irrespective of the dates the transactions are entered into. If transactions are linked SDLT will be calculated as if the consideration for all linked transactions was amalgamated. This prevents transactions being split to take advantage of the nil rate band or a lower rate of SDLT.

In the case of leases, the tax treatment depends on whether they are linked by way of a single scheme or arrangement or as a series of successive linked leases.

SDLT on successive linked leases is calculated as though the series of leases were one lease granted:

• at the time the first lease in the series was granted;
• for a term equal to the aggregate of terms of all the leases in the series; and
• in consideration of the rent payable under all of the leases in the series.

Where leases are linked but are not successive – for example, if leases of two neighbouring properties are granted by the same landlord to the same tenant – then the NPV of each lease will be aggregated for the purpose of applying the thresholds.

What happens where there is an agreement for lease?

Where an agreement for lease is substantially performed – for example, by the tenant going into occupation of the premises – a notional lease is treated as having begun on the date of that substantial performance. SDLT is calculated on this notional lease with the term running until the end of the term agreed in the agreement for lease. When the lease is actually granted the notional lease is treated as running from the date of substantial performance of the agreement for lease until the date of expiry of the actual lease in consideration of the total rent payable under the agreement for lease and the actual lease. This means that unless the terms of the actual lease differ from the agreement for lease there should be no further SDLT filing obligation once the actual lease is granted. An agreement for lease that is not substantially performed will be ignored for SDLT purposes and SDLT will be payable only by reference to the grant of the actual lease.

What if an existing lease is held over?

Where a lease is held over after the end of its term and a new lease is then granted, the SDLT position can be complicated and advice should be sought. An SDLT liability can arise in the holding over period before a new lease is granted, and interest could be running.

However, there should not be an SDLT charge before the new lease is granted, unless it is granted more than a year after the expiry of the old lease. If the new lease is granted more than a year later, an SDLT charge could arise by reference to each anniversary of the expiry of the old lease, until the new lease is granted.

What about intra group transactions?

The basic principle is that land transactions between group companies are eligible for relief. However, that relief must be claimed. Broadly, companies are members of the same group if one is the 75% subsidiary of the other or both are 75% subsidiaries of a third company.

However there are anti-avoidance provisions which prevent the relief being available in some circumstances. HMRC can also claw back SDLT relief in certain circumstances if within three years there are changes in the ownership of the purchaser - or, in more limited cases, the seller.

What about properties held in companies?

There are no specific rules concerning commercial properties held through companies or special purpose vehicles (SPVs). If the shares in such companies are sold rather than the underlying property then stamp duty will be payable at 0.5% rather than SDLT.

Special rules exist for residential properties that are held through companies.  Broadly, SDLT is charged at 15% where UK residential property costing more than £500,000 is purchased by certain non-natural persons, such as companies.  There is a 3% surcharge on residential properties bought by companies for under £500,000.

In addition, from 1 April 2013 the annual tax on enveloped dwellings (ATED) is charged annually on high value UK residential property held by certain non-natural persons. The rate of the ATED depends on the valuation of the property. For more details see our guide on Taxes on High Value Residential Property .

What are the payment/filing obligations?

There is a statutory obligation on the purchaser or tenant to submit a land transaction return and pay SDLT, if due, within 14 days of the effective date of a notifiable transaction. Note that if relief is being claimed then the transaction may still be notifiable, even if there is no SDLT to pay.

A certificate of SDLT paid may be required for the Land Registry in order to register the transaction. This certificate is issued by HMRC on the receipt of payment of SDLT.

A purchaser or tenant who fails to file a land transaction return by the filing date is subject to penalties. Interest is payable on SDLT which remains unpaid within 14 days of the effective date of the transaction.

Are there any anti-avoidance rules?

There are various anti-avoidance rules designed to prevent the avoidance of SDLT by using schemes. There is also an obligation on promoters of schemes to disclose them to HMRC.

Scotland and Wales

In Scotland, from April 2015, UK SDLT was replaced by a Land and Buildings Transaction Tax (LBTT) collected by the Scottish Government.  LBTT applies to all real estate transactions in Scotland.

Different rates of LBTT apply to residential and commercial property; however, both systems involve staggering rates, whereby different rates apply to different consideration bands and only consideration falling in each band is tax at that rate.  For more information on LBTT, see our guide on Land and Buildings Transaction Tax in Scotland .

For transactions taking place on or after 1 April 2018 involving land in Wales, Land Transaction Tax applies rather than SDLT. See our guide to Land Transaction Tax in Wales .

• Corporate Occupier
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• United Kingdom

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When will the assumption of debt be chargeable consideration?

Chargeable consideration , joint tenants , release or assumption of debt.

“1. Mummy and son own a BTL in equal shares. The Property is currently valued at approximately £300,000

2.  The value of the existing mortgage with Lender 1 is approximately £167,000

3.  Mummy will transfer her 50% share in the property to her son for nil consideration (gift) and son will simultaneously re-mortgage the Property in favour of a new Lender 2.

Given the above, in real terms the value of the gifted element will be our client’s 50% share of the Property (being £150,000) less 50% of the existing mortgage (being approximately £83,500), therefore making the total value of the gifted element as £66,500.

However, the existing debt, Lender 1, is classed as consideration. HMRC class the transaction as being an assumption of the outgoing party’s share of debt in the property (£83,500) by the transferee and therefore the redeemed charge is classed as an associated discharge. Whilst this figure is under the £125,000 threshold for SDLT, as the property is not the son’s main residence is he caught by the increased rate and does he have to pay 3% SDLT on the £83,500? Seems a little unfair to me, given that he has already paid stamp duty when he originally purchased the property. Is the transfer of equity considered a “purchase” for such purposes?”

Source: BLG Member

Yes the son will be liable for the 3%  surcharge on the 50% share he acquires.

Where there is the release or assumption of a debt (or the transfer of a property subject to a debt) the debt can constitute chargeable consideration for SDLT purposes.  The relevant provisions are in paragraph 8 of Schedule 4 FA 2003.

The basic rule is that where the consideration for a land transaction consists in whole or in part of:

1) the satisfaction or release of debt due to the purchaser or owed by the vendor (paragraph 8(1)(a)); or

2) the assumption of ‘existing debt’ by the purchaser (paragraph 8(1)(b)),

the amount of debt satisfied, released or assumed is taken to be the whole or, as the case may be, part of the chargeable consideration for the transaction.

1) debt is secured on the property immediately before and after the land transaction; and

2) the rights or liabilities of any party in relation to that debt are changed as a result of or in connection with the transaction,

there is taken to be an assumption of debt by the purchaser falling within paragraph 8(1)(b).

This is an anti-avoidance provision intended to prevent parties temporarily paying off secured debt before property is transferred and reinstating it immediately afterwards.

If there are two or more purchasers or vendors with undivided shares in the property the amount of secured debt treated as assumed is determined on the basis that the proportion of the amount owed by a person corresponds to the share that they own in the property subject to the debt.  For this purpose joint tenants are treated as owning the property in equal shares.

At the time of publication this response was correct however as tax legislation and practice change from time-to-time you should take specific advice before taking any action.

For more information on SDLT please see Ann’s Stamp Duty Land Tax Questions & Answers . This free resource covers a wide variety of SDLT queries and they can be filtered by subject to find specific queries of interest.

To be notified when new Q&As are published please sign up for alerts here.

Privacy Overview

Stamp duty land tax

As a solicitor, it may be that you:

• advise on SDLT
• file SDLT returns
• pay the tax on your clients’ behalf and within the applicable time limits

This page provides a summary of key points only – see our legal notice .

A solicitor who does not have the necessary specialist knowledge of tax should not advise on it and may need to advise clients to obtain specialist SDLT advice, especially in relation to higher risk transactions.

In Wales, SDLT has been replaced by land transaction tax .

Read the Welsh government guidance on land transaction tax

How much is payable  

SDLT has become a tax with complex rules about its scope, rates and reliefs.

It's payable when a purchaser acquires a ‘chargeable interest’ in land in England or Northern Ireland.

The amount payable is based on the ‘chargeable consideration’. Often this is the price the purchaser pays for the property or land, including any fixtures and fittings.

• Residential property

Where a UK resident individual buys their only residential property to occupy themselves, the thresholds and rates applicable are relatively straightforward.

For transactions with effective dates on and after 23 September 2022, if the chargeable consideration is £250,000 or under, then no SDLT is payable.

If the price is above the threshold, the purchaser must pay SDLT on the portion over £250,000.

The rate increases in bands, starting at 5% from £250,000 to £925,000 and going up to 12% for any portion above £1.5 million.

There are different rules in some circumstances for those buying their first home where the purchase price is £625,000 or less. (This threshold was increased to £625,000 from £500,000 for transactions with effective dates on and after 23 September 2022.)

From 1 April 2021, new rates of SDLT were introduced for buyers of residential property in England and Northern Ireland who are not resident in the UK.

The non-resident rates are 2% higher than rates that apply to purchases made by UK residents.

The rules for determining residence for this purpose differ from the rules for determining residence for other tax purposes.

It's possible for a buyer who is UK resident for other tax purposes to be treated as non-UK resident for SDLT purposes so that the higher 'non-resident' rates apply.

There are special rules for calculating SDLT on rents.  Read HMRC’s guidance on residential property rates

Other property and certain 'high value' residential property acquisitions

There are different rules, rates and thresholds for non-residential and mixed-use property.

Read HMRC’s guidance on non-residential and mixed-use property rates

A 15% flat rate of SDLT also applies to certain 'high value' residential property acquisitions by non-individuals. This is separate from the higher rates for additional dwellings provisions explained below.

As with the ordinary SDLT rates outlined above, from 1 April 2021 the rate is 2% higher (that is, 17%) for acquisitions by non-UK residents.

Residence for this purpose is determined under specific rules that differ from those which apply for other tax purposes, so it's possible for a buyer that is UK resident for other tax purposes to be subject to the higher 'non-resident' rate.

Higher rates for additional dwellings and purchases by non-individuals

Higher rates are charged for a purchase of certain additional residential properties by an individual and for a purchase of any dwelling by a non-individual, if the chargeable consideration is £40,000 or more.

This may apply, for example, when an individual purchases a buy-to-let property or a holiday home, if the purchase means the individual will own more than one property.

The purchaser must pay 3% on top of the normal standard rates, subject to any applicable conditions, exemptions or reliefs.

From 1 April 2021, the 2% non-resident SDLT surcharge may apply on top of the higher rates for non-UK resident purchasers.

Read HMRC’s guidance on higher rates of SDLT

HMRC’s SDLT calculator

The government’s SDLT calculator may help you to work out the tax payable, but it's not suitable for use in all transactions.

Reliefs  

A land transaction is chargeable to SDLT unless an exemption or relief applies.

Relief for first-time buyers

If the purchaser is a first-time buyer and the price of the property is £625,000 or less, they can claim first-time buyers' relief.

The buyer must be an individual and the property must be a residential property that the buyer intends to use as their main home.

They will pay no SDLT up to £425,000 and 5% on the portion from £425,001 up to £625,000.

If the chargeable consideration is more than £625,000 the purchaser cannot claim first-time buyers' relief and must pay the standard rate or, if applicable, the increased rates applicable to additional dwellings or for purchases by non-UK residents.

The thresholds described above apply for transactions with effective dates on and after 23 September 2022.

Read HMRC’s guidance on relief for first-time buyers

Other reliefs

Several other reliefs can be claimed, including for:

• purchases of multiple dwellings
• purchases by a charity of land and property for charitable purposes
• right to buy purchases

Read HMRC’s guidance on reliefs

Shared ownership property  

If the purchaser is buying a property through a shared ownership scheme operated by an approved qualifying body such as a housing association or local authority, they can decide to pay SDLT either:

• based on the total market value of the property – this is called a ‘market value election’, or
• just on the initial share they are buying

If they choose to pay SDLT just based on the initial share, they will need to make a further payment if they later buy additional shares that take their ownership above 80%.

Read HMRC’s guidance on SDLT for shared ownership property

Filing SDLT returns  

The purchaser must file a land transaction return even if they do not need to pay any tax, unless the transaction is exempt from SDLT or from notification.

You may be required to do this on the purchaser’s behalf.

You do not have to file a return if a land transaction is exempt from SDLT, such as where there is no chargeable consideration.

A land transaction may also be exempt from notification, for example, where it's a grant of a lease for a term of less than seven years where the chargeable consideration does not exceed the zero-rate threshold.

Read HMRC’s guidance on exemptions

'Exempt' here means specifically exempted from SDLT.

In addition, various reliefs from SDLT can apply to transactions that would generally be subject to SDLT to reduce the amount payable (often to zero), but which can only be claimed by filing a return that claims the reliefs.

This means a return still needs to be filed even though the result may be that no SDLT is payable.

The purchaser must file the return and pay the tax within 14 days of the ‘effective date’ of the transaction.

However, you may be obliged to do this on behalf of the purchaser/buyer – for example, if their mortgagee requires it.

The ‘effective date’ is usually the completion date, but it can be the date when the contract is ‘substantially performed’ if this happens before completion – for example, if the purchaser is given possession of the property early.

Online returns

If you’re a solicitor, you will need to register to use HMRC’s Stamp Taxes Online service. Find out how to register

You can then submit SDLT returns online .

As soon as you submit the return you will receive an online SDLT5 certificate and a unique transaction reference number (UTRN).

You’ll need to send the UTRN to HM Land Registry when you make an application to register the transaction.

Paper returns

A person who is not a solicitor or conveyancer cannot file a return online and will need to send a paper return to HMRC, using form SDLT1.

It must include a valid local authority code and be signed by the purchaser.

Paying the tax  

The deadline for paying the tax is the same as the deadline for filing the return: 14 days from the effective date of the transaction.

When paying, it’s important to use the correct 11-digit UTRN and the correct HMRC bank account. This will allow HMRC to link the payment to the SDLT return.

If you filed online, the UTRN will be on the SDLT5 certificate.

If you filed a paper return, the UTRN is on the payslip at the back of the form.

There are several ways to pay. Some methods take longer than others and you’ll need to allow enough time for the payment to go through before the deadline.

Payment methods include:

• Faster Payments
• online using a debit card or corporate credit card
• at a bank or building society
• by cheque through the post

Read HMRC’s guidance on paying SDLT

Penalties and interest for late filing and non-payment

A penalty of £100 is payable for a late return, or £200 if it's more than three months late.

A tax-based penalty may also be imposed if the tax is not paid within 12 months of the filing deadline.

Interest is charged on the amount owed.

Find out more about penalties and interest

Anti-avoidance  

You should be aware of the anti-avoidance measures applicable to SDLT.

There are anti-avoidance rules contained in the SDLT legislation, notably the wide rules at section 75A, 75B and 75C of the Finance Act 2003 and the rules on linked transactions at section 55 of the Finance Act 2003 .

There are also relevant measures outside of the SDLT legislation, including the rules of the Disclosure of Tax Avoidance Schemes (DOTAS) and the General Anti-Abuse Rule (GAAR), both of which apply to SDLT. 

Read our practice note on disclosure of tax avoidance schemes

Read the government's general anti-abuse rule guidance

Situations to watch out for  

Watch out for situations not necessarily covered by the guidance above, such as:

• commercial property purchases
• purchases by non-UK residents
• purchases by companies or other non-natural persons
• linked transactions
• new leasehold sales and transfers
• if the property price is not the same as relevant consideration for SDLT purposes
• cases where multiple dwellings relief might apply
• properties with annexes, subsidiary dwellings, paddocks or fields
• shared ownership properties
• not sold old main residence when buying a new main residence

If in doubt, seek specialist advice and/or advise your client to do so.

The rules are different for properties in Wales.  Read the Welsh government guidance on land transaction tax

Recent changes to SDLT  

The government regularly makes changes to SDLT which are often announced in its budget.

Changes are usually introduced through the Finance Act each year.

SDLT changes announced in the September 2022 mini budget

Two SDLT changes were announced in the chancellor's September 2022 fiscal statement.

The changes apply to transactions with effective dates on and after 23 September 2022.

First, the government increase the nil-rate band for purchases of residential properties from £125,000 to £250,000. This applies for purchases with an effective date on or after 23 September 2022.

Second, the government made two changes to first-time buyer's relief:

• increasing the level at which those eligible for first-time buyer's relief start paying SDLT from £300,000 to £425,000
• allowing first-time buyers to access the relief when they buy a property costing up to £625,000 rather than £500,000

Read more about these changes in HMRC's policy papers on:

• SDLT reduction – threshold changes
• SDLT factsheet

Watch HMRC's videos about these changes:

• standard calculation
• first-time buyer calculation
• higher rates (HRAD) calculation

HMRC's 2021 SDLT Manual updates and signs of increased investigations

HMRC released some notable updates to its SDLT guidance in 2021, including in relation to:

• the definition of 'garden or grounds'
• the section 75A anti-avoidance provisions
• the non-resident SDLT surcharge

Read the updates: HMRC Stamp Duty Land Tax Manual 2021

Some of these updates were issued in response to related court cases.

It also appears HMRC started to launch an increased number of investigations into incorrectly calculated SDLT once operations began to return to normal post pandemic.

HMRC has published further information about checks, repayments and paying back amounts not due .

We encourage you to ensure your clients take whatever steps they need to make sure their tax return is correct, including advising your clients to obtain advice from their expert tax advisers when necessary.

Possible future changes to SDLT  

Hmrc consultation on mixed-property purchases and multiple dwellings relief.

We responded to an HMRC consultation that invited views on possible changes to two areas of the SDLT regime:

• changes to the way SDLT is calculated for purchases of mixed property (purchases that consist both of residential and non-residential property)
• options to reform multiple dwellings relief (available on the purchase of two or more dwellings)

The aim of the consultation is to make the SDLT system fairer and reduce the scope for misuse and incorrect claims.

The consultation closed on 22 February 2022.

Watch HMRC's webinar on the changes to multiple dwellings relief

HMRC and CIOT published a detailed blog on SDLT refunds that warns some claims being made by firms offering help with SDLT refunds are too good to be true. It urges property buyers to exercise independent judgement before making a claim. Read the blog: stamp duty refunds: too good to be true?

Resources  

Practice notes.

Disclosure of tax avoidance schemes

Government guidance

SDLT calculator

HMRC Stamp Duty Land Tax Manual

Stamp duty and other tax on property

Online SDLT returns

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SDLT: Navigating Sub-sale Relief and Other Transfer of Rights

In the realm of Stamp Duty Land Tax (SDLT) , sub-sale relief, as outlined in Section 45 of the Finance Act 2003 and its associated Schedule 2A, holds considerable legal significance in transactions occurring prior to property sales finalisation.

SDLT relief on pre-completion transactions, commonly known as sub-sale relief, is available to the ultimate transferor of such transactions. These statutory provisions, specifically detailed within paragraphs 15-18 of Schedule 2A of the Finance Act 2003, provide crucial relief mechanisms for ultimate transferor of land transactions, offering full relief under specific conditions. To qualify, the transaction must either be an assignment of rights or a sub-sale.

Before we delve into the specifics of sub-sale relief, let us first understand the intricacies of the transactions where such relief maybe available and their legal ramifications.

Understanding Pre-Completion Transactions

Pre-completion transactions occur before the substantial performance or completion of the original contract for property conveyance. Put simply, they involve additional agreements related to property conveyance before the primary contract is finalised.

Types of Pre-Completion Transactions

1. Assignment:  This involves the purchaser under the original contract assigning their rights to another party. For instance, if A sells to B, and B then assigns their rights to C, it constitutes an assignment. It's important to note that while rights can be assigned, contractual obligations cannot be transferred.

2. Sub-sale:  In a sub-sale, A contracts to sell to B, who then contracts to sell to Party C.

• True Sub-sale: Here, B can instruct Party A to transfer the property directly to Party C, unless prohibited by the A to B contract.
• Back-to-Back Sub-sale: B completes the purchase from A and immediately sells to C, often done simultaneously.

3. Novation: Novation occurs when parties to the original contract agree to replace one party with another. This typically involves a tripartite contract, cancelling the original contract and establishing a new one between the original seller and the new buyer.

Compliance Procedures

In typical scenarios, except in cases of novation, sub-sale (pre-completion) relief must be sought by the original purchaser, B, either through inclusion in their land transaction return or by submitting an amendment to it.

For Example, 

To illustrate the application of these rules to an assignment of rights scenario:

• Initially, A enters into a sale and purchase agreement with B for land, with a consideration of £1 million to be paid upon completion.
• Subsequently, B assigns its rights under the contract to C in exchange for a payment of £100,000.
• C then completes the acquisition by paying A the agreed-upon £1 million.

The desired outcome here is that B should file a land transaction return for a transaction with consideration of £1 million, with the inclusion of a claim for full relief. Conversely, C should file a land transaction return reflecting a consideration of £1.1 million, accounting for the additional payment made for the assignment.

Novation, however, operates differently within pre-completion transactions.

In cases of novation:

• B does not acquire the property and is not deemed to do so.
• Consequently, B is exempt from SDLT based on general principles rather than a specific exemption, negating the need for B to submit a return or claim an exemption.

What Happens if SDLT Has Already Been Paid, and Then a Novation Occurs?

A significant advantage of novation arises when B has substantially performed their obligations. In such instances, where the contract between A and B is annulled rather than executed, B becomes eligible to claim a refund of SDLT paid, as outlined in Section 44(9) of the Finance Act 2003.

Minimum Consideration Rule

This rule is crucial in pre-completion transactions, especially when the parties are connected or not acting at arm's length. Under this rule, if connected parties are involved, the SDLT liability is based on the higher price payable by the parties.

If B and C are connected, or are not acting at arm’s length, then, while B is ordinarily still entitled to his exemption then C may have to pay SDLT based on the price B pays, instead of the price C pays. This applies even if B and C are not related and are dealing fairly with each other. Whether another party, A, is connected or not is irrelevant in this situation.

Let's simplify it:

• A is selling land to B for £1.5 million. Before the deal is done, B decides to sell the land to C for £1.2 million.
• B and C are siblings. In such circumstances, while B will still be entitled to relief, SDLT for C will be based on the higher price of £1.5 million.

SDLT sub-sale relief presents a valuable opportunity for property buyers to lessen their SDLT liability during sub-sale transactions . However, it's crucial to structure transactions correctly to qualify for this relief, particularly by carefully timing substantial performance of a contract. Solicitors and tax advisers should be engaged from the outset to navigate potential pitfalls.

Taxpayers must exercise caution when making claims aimed at exploiting sub-sale relief. In the recent years, various schemes have emerged primarily to exploit SDLT sub-sale relief. HMRC has effectively contested these schemes, often resulting in relief being denied or withdrawn.

Remember, if an opportunity seems too good to be true, it likely is!

Need expert advice on Sub-sale reliefs and other transfer of rights?

Contact us today for efficient and hassle-free assistance.

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SDLT: leases | Practical Law

SDLT: leases

Practical law uk practice note 8-107-4821  (approx. 41 pages).

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Stamp Duty Land Tax (SDLT) on leases

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Stamp Duty Land Tax (SDLT) is sometimes payable by tenants on leases. The SDLT payable is determined by the value of the lease, which is calculated based on any premium paid, the rent payable and the length of the lease. SDLT is more likely to be payable with medium to longer term leases or when the rents are higher. 

The SDLT becomes payable on the ‘effective date’ of the lease. This is usually the date of completion of the lease, though this date can sometimes vary if there has been ‘substantial performance’ before completion. The current filing deadline is 14 days from the effective date of the transaction. If SDLT is payable then an SDLT form will need to be lodged with HMRC within the relevant time frames along with any payment due.

Please note that whether or not SDLT is payable on your lease transaction, an SDLT form will still need to be filed with HMRC if the lease is for a term of seven years or longer.

Should you have any concerns regarding SDLT issues please do not hesitate to contact our commercial property solicitors on  01616 966 229 or complete our online enquiry form and we will contact you directly.

There are a number of circumstances during the term of your lease when SDLT may again become payable. It is imperative that you are aware of these circumstances as HMRC are becoming more and more aggressive in their pursuit of individuals and companies who have avoided, forgotten or simply not been aware that an SDLT payment has become due. You could be liable to fines and interest payments if you fail to correctly pay SDLT when due. The Inland Revenue have the ability to query for many years after they were due, and this gives them a large amount of leeway to chase missed SDLT payments. 

Below are a number of circumstances which may arise during, or at the end of your current lease, and which may give rise to an SDLT liability. Should you require any advice in respect of the same either now, or at any stage in the future, please do not hesitate to contact us closer for further advice. Please note that the responsibility for SDLT payments is your own and not knowing the rules will not be a valid excuse for HMRC.

Common SDLT requirements under leases

Rent review.

The SDLT payable on a lease is calculated by reference to the first five years’ rent. Therefore, if you have a rent review within the first five years and the new rent amount was not known at the outset (for example where rents are to be reviewed in line with market rents or business results as at a future date, or index-linked) then an additional return may need to be filed once the revised rent is determined. A further payment of SDLT may also be due at that stage.

Accordingly it is advisable to seek advice prior to or on the determination of any rent review, to ascertain the likely SDLT implications and whether any payments are required.

Lease expiry and holding over

If your original lease term expires, but you continue in occupation of the premises, then you are deemed to be ‘holding over’ your lease. Once your lease continues after its contractual expiry date then it is treated as if the original term of your Lease has been extended by one year. i.e. a five year lease will be treated as a six year lease. If SDLT was paid at the start of your lease (or if the extra year takes the lease over the SDLT threshold), then at this stage a further SDLT payment will be required and will need to be filed with HMRC. For each subsequent year that the lease is ‘held over’ another SDLT form needs to be filed. This is known as the growing lease regime. Failure to file further returns within the relevant short timescales could could result in fines.

Lease renewals

Unless your lease is expressly excluded from the Landlord and Tenant Act 1954, then as a commercial tenant, you are entitled to a new lease (on substantially the same terms) at the expiry of your current lease. Such renewal leases could have SDLT implications. 

You should always seek legal advice when taking a renewal lease as you have numerous rights to which you will be entitled. SDLT issues will also apply in this scenario.

Lease extension

If you agree to extend the term or the extent of the land included in your lease, then the extension is treated as a surrender and re-grant, and SDLT may be payable on the value of the re-granted lease. 

Breaking a lease

Please note that if you decide to break your lease early, you are not entitled to get any money back from HMRC, despite having paid SDLT for the full lease term. 

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Stamp Duty Land Tax Manual

Sdltm21580 - registration of interest in land.

FA03/S79 prevents the registration of land acquired in most notifiable land transactions unless the person applying to have their interest registered produces a certificate (in practice the SDLT5) showing they have met their SDLT obligations.

In a subsale, there will generally be two transfers of the land: A to B and B to C.

If B wishes to register its interest in the land, it will need to produce an SDLT5 together with its application for registration and the transfer from A to B, in the normal way.

If B does not wish to register its interest in the land, C will need to produce C’s SDLT5, its application for registration and the transfers from A to B and B to C. With its application for registration, C should also either:

• confirm in writing that B acquired the land from A and transferred it to C in pursuance of a ‘free-standing transfer’ for the purposes of Schedule 2A to the Finance Act 2003, or
• produce written confirmation from B (or B’s agent) that B acquired the land from A and transferred it to C in pursuance of a ‘free-standing transfer’ for the purposes of Schedule 2A to the Finance Act 2003.

If there is only one transfer of the land - A to C - then C will only need to produce its SDLT5, its application for registration and the transfer from A to C.

In an assignment of rights, there will be just one transfer of the land: A to C. In this case, C can register its interest in the normal way. Although the notional land transaction between A and B is notifiable for SDLT purposes, FA03/S79 does not apply to the notional transaction. There is no need for a letter confirming an assignment of rights. Only C’s SDLT5 is needed.

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6.6 Assignment of leases

6.6.1 the charge on assignment.

Where a current lease is assigned, the transaction is treated in the same way as a freehold purchase by the assignee. As such, the incoming tenant will pay SDLT on any chargeable consideration provided at the applicable rates shown at 2.4 (depending on whether the leasehold property is residential or non-residential).

The assumption by the assignee to pay future rent or observe the terms of the lease does not count as chargeable consideration for the assignment (see also 6.6.3 ).

Law: FA 2003, Sch. 17A, para. 17

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SDLT—common lease transactions

Published by a lexisnexis tax expert.

This Practice Note provides an overview of the stamp duty land tax (SDLT) treatment of the following common lease transactions:

grant of a lease

linked leases

surrender and re-grant of a lease

agreement for lease

assignment of an agreement for lease

reverse premium

assignment of a lease

variation of a lease

surrender of a lease

lease to a bare trustee or nominee, and

reversionary lease

For information on when SDLT applies generally, see Practice Note: Land transactions, chargeable interests and chargeable transactions and for details of how to calculate SDLT payable on lease transactions, see Practice Note: SDLT chargeable consideration—leases.

This Practice Note does not cover leases and holding over. For more on this topic, see Practice Note: SDLT and holding over.

SDLT ceased to apply to any land transaction involving any interests in or over land in Scotland from 1 April 2015. From that date, land and buildings transaction tax (LBTT) applies to such transactions, subject to transitional provisions. Consequently, references in this Practice

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Related legal acts:

• Finance Act 2003 (2003 c 14)

Key definition:

Stamp duty definition, what does stamp duty mean.

A transfer tax payable on documents and instruments, rather than in respect of a transaction. It is most commonly encountered on the transfer of UK certificated shares, where the stock transfer form is the instrument that is stamped.

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Stamp Duty Land Tax on Leases

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:

Rent review 

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.

Holding Over

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).

Lease renewals 

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

Published by BHW Solicitors

Categorised in: Commercial Property , News

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