Stamp Duty Land Tax on a new commercial lease - the basics of what a tenant needs to know

 Everyone knows and understands that Stamp Duty Land Tax (SDLT) is payable on the acquisition of a commercial or residential property. The same principles apply to the purchase price (known as a premium) for the grant of a new lease.

What about when a business takes a lease of commercial premises to trade from where there is no premium payable to the landlord. I often get quizzed on why SDLT would be payable in these circumstances?

The answer is that depending on the length of the lease term and the amount of the annual rent SDLT can be payable on a business lease.

One of the important points to note when calculating SDLT on any transaction is that you have to take the VAT inclusive figure. Yes, you have read that correctly that does mean tax on tax!

So if you have a relatively long lease at a modest rent or short lease at a high rent then you are likely to be liable for SDLT on the rent.

There is a complicated formula for working out whether the rent under a lease is subject to SDLT and this is known as the Net Present Value (NPV). HMRC helpfully have an online calculator - see here. 

A very rough and ready way to calculate the NPV on a new lease is to take the term of the lease and multiply that by the VAT inclusive annual rent (ignoring any concessions or rent free period). If that amount is more than £150,000 (the threshold where no tax is due) then SDLT would be payable. The amount of SDLT is then currently 1% on the NPV between £150,000 and £5million and 2% above that level.

Taking that formula, see the example below.

Lease Term of 10 years x Annual Starting Rent (inc VAT) of £45,000 = £450,000 less £150,000 x 1%

Approximate SDLT due = £3,000

The quick calculation done in my head using the above always gives an overestimate due to the way the actual NPV formula works. On the above example the actual SDLT due using the HMRC calculator would be £2,242. The advantage of being able to work the figure out is that you can always know if SDLT is likely to be applicable or not when speaking to a new client as it’s important they budget for this from the start especially a new start up.

When you do get the Heads of terms agreed it’s then possible to work out the accurate tax due by putting the figures into the HMRC online calculator and at that point you should take account of any rent free period, concessions or stepped known rent increases. There are special rules and extra requirements for rent reviews during the first 5 years of the lease where this is not yet ascertained e.g. an open market rent review.  

There is a relatively simple way to reduce the SDLT due on a lease. Take the example above but the 10 year lease contains a tenant only break at the end of year 5. If this break is exercised the lease comes to an end early and HMRC are not obliged to refund any ‘overpayment’ of Stamp Duty Land Tax. However, if you were to restructure the lease as an initial 5 year term with a contractual right for the tenant to renew the lease for another 5 years (once only) then you end up with the same result but less tax at the commencement of the lease. The SDLT on the above example would be £531 representing a saving of £1711. The balance of the SDLT would then only become payable if the option to renew is triggered at year 5. It is fair to say that some landlords would oppose this but we have been successfully able to negotiate the option as an alternative to the break clause where the SDLT saving is a large amount.

The SDLT on a new lease (as with all other transactions) becomes payable on the ‘effective date’. This would normally be completion of the lease but can be earlier if there has been ‘substantial performance’ of the contract, which could be occupation of the premises or payment of rent. The rules on this are complicated and I don’t intend to provide a detailed analysis here.

The current deadline to submit a Stamp Duty Land Tax return to HMRC is 14 days from the effective date. Payment of any tax due is payable within the same time period so it’s important not to be delay otherwise you could be liable for late filing penalties and interest.

It is worth noting that whether or not SDLT is payable on a lease, a return will still need to be filed with HMRC if the lease is for a term of seven years or longer due to the fact the lease must also be registered at the Land Registry.

This blog post should not be taken as tax advice and is a meant only as a general overview of the SDLT rules on the grant of a new commercial lease. The rates are correct at the time of writing but subject to change at any point.

When taking instructions for a client of Feldon Dunsmore we would always assess the likely SDLT liability at the beginning when reviewing the Heads of Terms. To request a fixed fee quote for dealing with a commercial lease as landlord or tenant please contact Paul Harrison by email here or another member of the team.

Author: Paul Harrison 

23 April 2021