If you are thinking of buying or leasing commercial premises, understanding your Stamp Duty Land Tax (SDLT) obligations is crucial. SDLT is a significant, complex and sometimes overlooked aspect of property transactions. It is important that you accurately determine and settle any SDLT liability for your specific commercial property transaction to avoid penalties.
In this article, our commercial property solicitors will consider how SDLT applies to common transactions in commercial property such as purchases, leases, assignments and surrenders. We will also address the process and formalities behind payment, and briefly explore some complex areas.
It is worth mentioning at the outset that any rules or rates are subject to changes over time.
- What is Stamp Duty Land Tax?
- Why do we need to pay it?
- What is the stamp duty threshold on a commercial property transaction?
- Do you need to pay stamp duty on all commercial property transactions?
- When is commercial stamp duty payable?
- Implications of SDLT when buying commercial property
- SDLT considerations for commercial property leases
- Lease duration and SDLT liability
- SDLT implications for lease assignments and surrenders
- Complex arrangements
- What are the current commercial SDLT rates?
- Compliance and Filing Requirements
- How solicitors can help you remain compliant with your SDLT obligations
What is Stamp Duty Land Tax?
SDLT is a mandatory self-assessment tax imposed on the transfer of land or property. In the case of commercial property, SDLT is payable in respect of land or buildings used for non-residential purposes, such as offices, shops, warehouses, and industrial premises. The tax is progressive in nature, meaning that higher rates are applied to the portion of the property price that falls within each threshold.
Why do we need to pay it?
SDLT was introduced historically as a temporary measure to raise funds for war, however the government continued to levy the tax as a means of generating revenue. It is also used to regulate the property market.
What is the stamp duty threshold on a commercial property transaction?
The stamp duty threshold for commercial property transactions in the UK is currently £150,000.
Do you need to pay stamp duty on all commercial property transactions?
If the value of the transaction falls below the threshold, you do not have to pay SDLT. There are also certain transactions that are ‘exempt’ from SDLT including where:
- No money or other type of payment has changed hands (for eg gifts of land)
- The property has been left in a will
- The property has been transferred as a result of divorce or dissolution of a civil partnership
- A registered landlord has granted a certain type of lease
Exempt transactions are also non-notifiable, which means no land transaction return needs to be submitted to HMRC.
When is commercial stamp duty payable?
SDLT is triggered on the ‘effective date’ of the transaction, which is typically the day the contract completes, or the date the contract is ‘substantially performed’. The contract may be deemed as substantially performed if:
- 90% or more of the consideration due under the contract (normally the purchase price) is paid or provided before completion
- The buyer or incoming tenant (or connected persons) takes possession of the whole or substantially whole of the property in advance of completion (ie obtain the keys and is entitled to occupy the property). Possession also includes receipt of rent / profits from the property or a right to receive them
- If the effective date of your transaction takes place on or after 1 March 2019, SDLT must be paid within 14 days after the effective date. The 30-day deadline that existed prior to this is only preserved for very specific circumstances
Implications of SDLT when buying commercial property
It is important to factor SDLT when choosing a commercial property and arranging your finances in advance of a purchase. The type of purchase (freehold or leasehold), purchase price, annual rent and length of lease all impact the amount of SDLT you end up paying.
For leased premises, you should also be aware that SDLT may become payable again during the course of a lease as a result of rent reviews. If you remain in occupation of a premises after the contractual expiry of the lease, SDLT liability may be triggered for any 'holding over' period under the terms of the existing lease, and if the lease is renewed. The SDLT provisions for lease renewals and holding over periods are complex.
It is also worth noting that if you exercise a break clause in your lease for early exit, you will not be entitled to recover any monies paid in respect of the remainder of the term. It is therefore a good idea to get commercial property solicitors involved when negotiating and agreeing heads of terms so that you are aware of and can perhaps mitigate SDLT implications.
Factors that impact SDLT liability:
There are a number of factors that can impact your SDLT liability, including:
- Purchase price: different SDLT rates apply to different portions of the purchase price. Higher purchase prices will generally result in higher SDLT liabilities. The current rates are set out here.
- Property type: rates differ for freehold and leasehold properties
- Leasehold terms: the length of the lease, premium paid (if any) and rent payable under the lease can all impact the SDLT liability
- SDLT reliefs and exemption: there are a number of reliefs and exemptions that may be available to reduce SDLT liability depending on the transaction. This includes transfers between companies within the same group to facilitate corporate restructuring, properties purchased for charitable purposes, multiple dwellings purchased in a single transaction such as a portfolio of residential properties, certain property investment funds, and many more
- Linked transactions: if multiple transactions are related or linked, SDLT may be calculated based on the total value of those transactions combined. This can impact the overall SDLT liability
- Location: SDLT applies to properties located in England. In Wales, Land Transaction Tax (LTT) replaced SDLT in April 2018, while in Scotland Land and Buildings Transaction Tax has been in place since April 2015
SDLT considerations for commercial property leases
There are several SDLT considerations to keep in mind when purchasing a commercial lease, including:
- SDLT on lease premiums: SDLT may be payable on any premium paid for the grant of the lease for the portion that exceeds the threshold (£150,000). The SDLT due will be calculated on the same sliding scale/tier system as freehold commercial property purchases. For more information view the current commercial SDLT rates.
- SDLT on rent: in addition to lease premiums, SDLT may also be payable on any rental payments due under the lease. This is calculated based on the net present value (NPV) of the lease, a complicated formula which takes into account the expected rental payments (inclusive of VAT) over the term of the lease at present day prices. If the NPV exceeds the £150,000 threshold, SDLT is payable on a sliding scale
- Rent reviews and variations: in cases where the lease includes rent reviews or variations, SDLT may be payable on any increase in rent that occurs as a result. The additional SDLT is calculated based on the NPV of the increased rent over the remaining term of the lease
- Exemptions and reliefs: certain types of leases may be exempt from SDLT, such as:
- new or assigned leases of 7 years or more, provided the premium is less than £40,000 and annual rent less than £1,000
- new or assigned lease less than 7 years, provided the amount paid is less than the residential threshold or non-residential threshold of SDLT
There are also various SDLT reliefs that may apply to a particular transaction for eg: sales and leasebacks and transactions involving charities. You should consult your professional advisory team to understand the full range of reliefs available to avoid accounting for SDLT unnecessarily.
Lease duration and SDLT liability
The duration of the lease has a significant impact on SDLT liability. This is because working out the NPV involves calculating the total rent payable over the life of the lease, taking into account inflation. As such, a long lease even at a modest rent can attract SDLT liability, while the same goes for a short lease at a high rent. Generally speaking, the shorter the lease term and the lower the rent, the less SDLT liability due.
SDLT implications for lease assignments and surrenders
Commercial Lease Assignments:
If you take over an existing lease, SDLT is generally only payable on the lease premium (plus VAT), which refers to any lump sum payment made for the assignment. In most cases, the SDLT is worked out using the same thresholds and rates as a commercial property purchase.
Commercial Lease Surrenders:
If you and your landlord agree to terminate the lease before its original expiry date, SDLT may be applicable if there is a payment or other consideration provided by the landlord for the surrender. SDLT is calculated based on the amount or value of such consideration.
Various mitigation methods and reliefs exist to reduce or even eliminate SDLT on more complex transactions. We do not intend to cover all scenarios in detail in this note, however some common areas include:
- Sub-sale relief: this may be used if you enter into a contract to purchase (or lease) land but, before completion, you agree to sub-sell, assign or transfer your rights to a third party. The relief enables you, as the original buyer to reclaim any tax paid, so that SDLT is only paid by the end transferee who acquires the property or land
- Overlap relief: this is designed to alleviate double taxation on the same rent, most commonly encountered on the surrender and regrant of a lease over the same, or substantially the same premises. It works by reducing the rent payable in the overlap period by the rent that was taken into account in determining the SDLT on the grant of the old lease
- Partnership relief: SDLT reliefs and rules apply to properties transferred in and out of partnerships (including contributions by incoming or existing partners or connected persons, or distributions to), and transfers of partnership interest in property investment partnership (PiP)
What are the current commercial SDLT rates?
The SDLT rates for commercial property are currently:
- 0% on the portion up to £150,000
- 2% on the next £100,000 portion that falls between £150,001 and £250,000
- 5% on the remaining portion above £250,000
The rates and thresholds for leasehold properties, based on the NPV are currently:
- 0% on the portion up to £150,000
- 1% on the portion from £150,001 to £5,000,000
- 2% on the portion above £5,000,000
Compliance and Filing Requirements
- SDLT filing obligations for commercial property transactions
In most cases, the responsibility falls on the buyer to complete and file the return with HMRC, and calculate and pay any SDLT owed within the set deadlines.
- Time limits and penalties for late SDLT filings
1. Filing time limit: the purchaser must submit the SDLT return and pay any tax due within 14 days of the completion of the transaction or substantial performance of the contract. The completion date is usually the date when ownership of the property is transferred or the date when the lease is granted.
Note that the transaction may still be notifiable to HMRC even if there is no SDLT to pay, for eg because of a relief being claimed or because it falls below the threshold.
2. Late filing penalties: If the SDLT return is not filed (and paid) within the 14-day time limit, penalties may be applied. The penalty regime is currently:
- Up to 3 months late: a fixed penalty of £100 is charged.
- after 3 month date: the fixed penalty increases to £200.
- In cases where the SDLT return is more than 12 months late, further penalties may be imposed up to the amount of the SDLT due.
3. Interest charges: if the SDLT payment is not made by the due date, interest charges may be levied on the outstanding amount on a daily basis.
These penalties and time limits may be subject to change. Consult the official HMRC guidance or seek professional advice for the most up-to-date information.
How solicitors can help you remain compliant with your SDLT obligations
As solicitors, we play a crucial role in ensuring SDLT compliance. This includes:
- Highlighting and explaining your SDLT obligations at the outset of the transaction
- Calculating the SDLT due, including identifying and claiming any applicable reliefs or exemptions that may reduce your SDLT liability
- Accurately completing and submitting the necessary SDLT forms to HMRC, and ensuring the correct amount is paid within the deadline. Typically we handle the payment on your behalf and facilitate the transfer of funds to HMRC online
- Maintaining detailed records of all SDLT calculations, payments, and associated documents on file
Importantly, we can advise you at the outset on how best to structure your commercial property transaction from a tax point of view. We work closely with tax experts and financial advisors to understand your unique circumstances and SDLT implications, and find an appropriate solution. For eg, the way a lease is set up can reduce SDLT liability, therefore it is important to seek professional advice at the outset when negotiating heads of terms.
Given the complexities of SDLT and its potential impact on your commercial property purchase, it is important to seek advice from qualified experts at the outset. At Harper James, we have extensive knowledge, expertise and connections in this area. We provide guidance tailored to your specific circumstances to help mitigate where possible, and comply with your SDLT obligations. Complete the form below and contact one of our experienced commercial property solicitors today.