Commercial Stamp Duty

This sets out the basic principles of stamp duty land tax (SDLT) on commercial property. SDLT is charged on the substance of a property transaction rather than the type of document which gives rise to the transaction. It arises irrespective of the nature or effect of particular documents, and there need not be any document for a charge to arise.

What are the main characteristics of SDLT?

SDLT is payable on land transactions where the land is in the UK. 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 30 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.

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 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

Band Rate
Not more than £150,000 0%
For the amount between £150,000 but not more than £250,000 2%
For the amount above £250,001 5%

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.

On rent

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.

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.

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