Business tax – guidance

Stamp Duty Land Tax: leasehold sales

Find out about Stamp Duty Land Tax (SDLT) on leasehold properties.

Overview

SDLT no longer applies in Scotland. Instead you pay Land and Buildings Transaction Tax when you buy property.

The amount of SDLT you pay when you buy a leasehold property, depends on whether it’s an existing lease (an assigned lease) or a new one.

Assigned leases

Residential and non-residential properties are leasehold or freehold.

Example

A developer builds some flats and sells them on 99-year leases. You buy one of the 99-year leases and sell it when it still has 88 years to run. You assign the lease to the new owner for the rest of the period.

The new owner pays a lump sum for the assignment of the lease and pays SDLT on this amount.

In most cases, use the same rates and thresholds to work out the amount of SDLT as you would if you bought a freehold property (residential or non-residential freehold).

Filling in the SDLT return

The rules for filling in the SDLT return for an assigned lease are the same as the rules for a freehold property. Fill in a return if the sale price is £40,000 or more, even if no SDLT is due.

New leases

If you buy a new lease, the SDLT you pay depends on the amount of:

  • the premium
  • any rent due

New leases with a nominal rent

When you buy a new lease and pay a premium, but only a nominal rent (a peppercorn for example), calculate SDLT on the amount of the premium only. This applies for both a residential or non-residential lease.

Calculate the SDLT on the premium in the same way as you would for the sale price of a freehold property. Fill in an SDLT return if the sale price is £40,000 or more, even if no SDLT is due. If the lease is less than 7 years and no tax is due, you don’t need to do a return.

New leases with more than a nominal rent

If you buy a new lease, pay a premium and more than a nominal rent, work out the SDLT on:

  • the premium
  • the value of rent payable over the term of the lease at present day prices (net present value)

Normally, you only pay SDLT on the rent if it’s high. It depends on the length of the lease, for example £4,500 a year for a 99-year lease.

Calculations for residential or non-residential leases

There are different rules to work out the SDLT on new residential and non-residential leases.

Residential property is:

  • a building used or suitable to use as a private home
  • a building adapted to use as a private home
  • land that’s the garden or grounds of a private home (including a right or interest in that land) usually up to a limit of 0.5 hectares

If you buy 6 or more separate properties in one transaction, it counts as non-residential.

New residential leases

When you buy a new residential lease, work out both the amount due on the premium and on the rent. Add them together for the total amount due.

SDLT on the premium

Work out the SDLT on the premium as if it was the sale price of a freehold property. Don’t take into account the level of the rent due under the lease.

Example

You pay a premium of £200,000 on a new residential lease, you pay SDLT at the rate of 0% on the first £125,000 and 2% on the rest (£75,000). The amount you pay is £1,500.

The net present value of the rent

If the net present value of the rent is more than £125,000 (the SDLT threshold on residential property), the buyer pays SDLT on the rent and on the premium. But in this case, calculate the tax at a flat rate of 1% on the amount of the net present value that’s over the SDLT threshold. If you’ve already used the threshold, for example with a linked lease, then use 1% on the total net present value to calculate the tax.

Example

The net present value of the rent under a lease is £180,000, the amount of the net present value that’s over the £125,000 threshold is £55,000. Pay SDLT on £55,000 at 1%. Add this to the amount of SDLT due on the premium.

Fill in the return

For new leases, fill in the SDLT return even if there’s no SDLT due, unless either:

  • the lease is for 7 years or more, the premium is less than £40,000 and the annual rent is less than £1,000
  • the lease is for less than 7 years and you don’t pay SDLT on any part of the premium or rent

Fill in the SDLT return online and calculate and pay any tax due.

Calculate SDLT on new non-residential leases

The amount of SDLT due when you buy a new non-residential lease depends on the amounts of the premium and rent you pay under the lease.

The premium

If the annual rent for the lease (not the net present value) is less than £1,000, as a buyer you pay SDLT on the premium. This is at the same rate you would pay on the sale price of a freehold non-residential property. This means you’ll only have to pay SDLT if the premium is more than the threshold.

If the annual rent is £1,000 or more, you pay SDLT on the whole of the premium. The zero rate of SDLT doesn’t apply, even if the premium is under the £150,000 non-residential threshold. Use the 1% rate to work out the tax on a premium up to £250,000, and the higher rates if it’s more than this.

Example

You pay a premium of £130,000 and an annual rent of £1,500. You’d pay SDLT at the rate of 1% on the whole of the premium. The tax due would be £1,300.

The net present value of the rent

If the net present value of the rent is over the non-residential SDLT threshold (150,000), you pay SDLT on the rent as well as on the premium. Calculate the tax at a flat rate of 1% on the amount of the net present value over the threshold.

Example

The net present value of the rent for a non-residential lease is £200,000, so the amount of the net present value over the threshold is £50,000. This means you pay SDLT on £50,000 at the rate of 1%. That’s £500. Add this to the amount you pay on the premium.

Calculate the net present value of the rent

Use the SDLT lease transactions calculator to work out the net present value and the amount of any SDLT due. Select ‘residential’ or ‘non-residential’ as appropriate, for the property type. Make sure you have these details to hand:

  • effective date of the transaction - usually the date of completion
  • start and end dates as shown in the lease
  • total premium payable (for non-residential or mixed used properties)
  • rent payable in each of the first 5 years, if you know it

If the term of the lease is longer than 5 years, the calculator will work out the amount of SDLT due by taking the highest rent payable in the first 5 years. It will apply that amount to each year of the rest of the term.

If VAT is payable on the rent

Include any VAT payable on the rent in the net present value calculation. Use the rates:

  • 1 January 2010 to 3 January 2011 inclusive - 17.5%
  • 4 January 2011 onwards - 20%

All or part of rent unknown or uncertain

When you buy a lease, you may not know how much the rent will be each year, because the amount depends on how well the business does, for example.

In this case, when you work out the net present value of the rent, estimate what the rent will be to calculate the SDLT due. Then, recalculate the net present value when either:

  • you know the actual amount of the rent
  • the first 5 years have passed

If your recalculation shows that the net present value is more than the amount you used on your original SDLT return, tell HM Revenue and Customs (HMRC) and pay any extra tax due.

Write to the Birmingham Stamp Office within 30 days of the review date to tell them the revised figure for the net present value. Include the extra payment due. You must write even if you made the original notification online.

If your recalculation shows that you overestimated the net present value and paid too much SDLT, write to claim a refund.

Term of lease is unknown or indefinite

If you don’t know the term of the lease or it’s not definite, count it as a lease for a fixed term of one year to calculate the net present value. If it carries on after the end of the first year, count it as a lease for a fixed term of 2 years and so on for as long as it continues. This is a ‘growing lease’.

If the lease is a growing lease, fill in the SDLT return if either:

  • SDLT is due when the lease is granted
  • SDLT becomes due as the lease continues

If a tenancy carries on from one period to the next it’s called a ‘periodic tenancy’ (unless either party gives notice to end it). This is the most common example of an indefinite lease.

Lease surrendered and new lease granted on the same property

There are special rules to use when a landlord surrenders a lease early and a grants a new lease to the same tenant for the same property.

Original lease granted on or after 1 December 2003

If the rent for the new lease is higher than the rent for the old one, calculate the net present value for the period covering:

  • the start of the new lease
  • the date when the old lease was due to end - use only the amount of rent increase

This is an overlap period and you may be able to claim overlap relief.

Example

The monthly rent increases by £200 at the start of the new lease, and the old lease is due to end 12 months later, the amount of rent taken into account for this period is £2,400. Then, take into account the full rent due for the rest of the term of the new lease.

If you have problems with the calculation, contact the Birmingham Stamp Office.

Original lease granted before 1 December 2003

If the original lease was a ‘Stamp Duty lease’ and granted before SDLT was introduced on 1 December 2003, use the whole rent for the term of the new lease to calculate the net present value.