Find out how much Stamp Duty Land Tax (SDLT) you might have to pay for a leasehold property.
When you buy a leasehold property, the amount of SDLT you have to pay depends on whether it’s an existing lease or a new one.
If it’s an existing lease, an ‘assigned lease’, you only have to pay SDLT on the ‘premium’ (the lump sum paid to buy a new lease). This is the same as if you had bought a freehold property. The same rates, thresholds and conditions for deciding whether to complete an SDLT return apply.
How you calculate SDLT on a new lease depends on:
- the ‘premium’
- the rent payable under the lease
- whether it’s a residential or non-residential lease
Whether you’ll need to complete an SDLT return depends on the length of the lease and the amount of the rent and premium.
Residential and non-residential properties can be leasehold or freehold. For example, a developer might build some flats and sell them on 99 year leases. If you bought one of the 99 year leases, sold it when it still had 88 years to run, you would assign the lease to the new owner for the remainder of the period.
This new owner normally pays a lump sum for the assignment of the lease and they pay SDLT on this sum.
In most cases you calculate the amount of SDLT using the same rates and thresholds as you would if you bought a residential or non-residential freehold property.
Check the current and earlier year SDLT rates and allowances for this type of property.
Completing the SDLT return
The rules for when you must complete an SDLT return for an assigned lease are the same as for a purchase of freehold property. As a buyer, you must complete a return if the purchase price is £40,000 or more, even if no SDLT has to be paid.
If you buy a new lease, the SDLT you have to pay depends on 2 things:
- the amount of the premium
- the amount of any rent due
New leases with a nominal rent
When you buy a new lease and pay a premium but only a nominal rent (such as a peppercorn), you only calculate SDLT on the amount of the premium. This applies whether it’s a residential or non-residential lease.
You should calculate the SDLT on the premium in the same way as you would for the purchase price of a freehold property. You have to complete an SDLT return if the purchase price is £40,000 or more, even if no SDLT is payable.
New leases with more than a nominal rent
If you buy a new lease, pay a premium and more than a nominal rent, you have to work out the SDLT separately on:
- the premium
- the value of the rent payable over the term of the lease at present day prices (net present value)
It depends on the length of the lease, but you’ll normally only have to pay SDLT on the rent if it’s fairly high. For example, about £4,500 a year for a 99 year lease.
Calculations for residential/non-residential leases
There are different rules for working out the SDLT on new residential and non-residential leases.
Residential property is:
- a building being used or suitable to be used as a private dwelling (including ones that are being built or adapted to be used as a private dwelling)
- land that’s the garden or grounds of a private dwelling (including a right or interest in that land), usually up to a limit of half a hectare
If 6 or more separate properties are bought in a single transaction, it’s treated as non-residential.
New residential leases
When you buy a new residential lease, you have to work out the amount due on the premium and on the rent separately. You then add the 2 amounts together to work out the total amount due.
SDLT on the premium
You work out the SDLT on the premium in the same way as if it was the purchase price of a freehold property. You don’t take into account the level of the rent due under the lease.
For example, if you paid a premium of £200,000 on a new residential lease, you would pay SDLT at the rate of 0% on the first £125,000 and 2% on the remaining £75,000. So the amount due would be £1,500.00
The net present value of the rent
If the net present value of the rent is more than the residential property SDLT threshold of £125,000, the buyer has to pay SDLT on the rent as well as on the premium. However, in this case you calculate the tax at a flat rate of 1% on the amount of the net present value that exceeds the SDLT threshold.
For example, if 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. SDLT has to be paid on this £55,000 at the rate of 1%. This is added to the amount of SDLT that’s due on the premium.
Completing the return
For new leases you’ll need to complete an SDLT return even if there’s no SDLT due, unless either of the following applies:
- 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 have to pay SDLT on any part of the premium or rent
The easiest way to complete an SDLT return and calculate and pay any tax due is online.
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.
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 at the same rate as you would on the purchase price of a freehold non-residential property. So 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 within the £150,000 non-residential threshold. You 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.
For example, if you paid a premium of £130,000 and an annual rent of £1,500, you would have to 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 more than the non-residential SDLT threshold, you pay SDLT on the rent as well as on the premium. You calculate the tax at a flat rate of 1% on the amount of the net present value over the threshold. The SDLT threshold for non-residential property is £150,000.
For example, if the net present value of the rent for a non-residential lease is £200,000, the amount of the net present value over the threshold is £50,000. Therefore you have to pay SDLT on £50,000 at the rate of 1%, that’s £500. This is added to the amount that you pay on the premium.
Calculate the net present value of the rent
You can use the SDLT lease transactions calculator to work out the net present value and the amount of any SDLT due on it. You should select ‘residential’ or ‘non-residential’ as appropriate, for the property type.
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 and then applying that amount to each remaining year of the term.
If VAT is payable on the rent
You should include any VAT payable on the rent in the net present value calculation using the following 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 exactly how much the rent is going to be each year. For example, this could be because the amount depends on how well the business does.
In this case, when you work out the net present value of the rent, you’ll have to make a reasonable estimate of what the rent will be so you can calculate the SDLT due. You’ll then have to recalculate the net present value when the first one of the following occurs:
- you finally 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 to complete the original SDLT return, you’ll have to notify HM Revenue and Customs (HMRC) and pay any extra tax due.
You must write to the Birmingham Stamp Office within 30 days of the review date telling them the revised figure for the net present value and enclosing any extra payment due. You’ll have to do this in writing even if you made the original notification online.
If your recalculation shows that you overestimated the net present value and paid too much SDLT, you can write to claim a refund.
Term of lease is unknown or indefinite
If you don’t know the term of the lease, or if it’s not definite, you treat it as if it’s a lease for a fixed term of 1 year to calculate the net present value. If it carries on after the end of the first year, you treat it as if it’s a lease for a fixed term of 2 years and so on for as long as it continues. This is called a ‘growing lease’.
If the lease is a growing lease, you’ll only have to complete an SDLT return if either of the following apply:
- 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 unless either party gives notice to terminate it, it’s called a ‘periodic tenancy’. This is the most common example of an indefinite lease.
Lease surrendered and new lease granted on the same property
There are special rules for when a lease is surrendered early and a new lease is granted by the same landlord to the same tenant for the same (or substantially 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, you calculate the net present value for the period covering the start of the new lease up to the date when the old lease was due to end using the amount of rent increase only.
For example, if 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. You then take into account the full rent due for the remaining term of the new lease.
You can’t use the online calculator to work this out, so you’ll have to do it manually. If you have problems making the calculation you can contact the Birmingham Stamp Office.
Original lease granted before 1 December 2003
If the original lease was a ‘Stamp Duty lease’ that was granted before SDLT was introduced on 1 December 2003, the whole rent for the term of the new lease is used to calculate the net present value.