The Stamp Duty regime was replaced by Stamp Duty Land Tax (SDLT) in 2003. SDLT is applicable to both residential and commercial properties and both freehold and leasehold properties. Usually the amount of SDLT payable is clear when purchasing a property when the price or premium paid is compared against the usual SDLT thresholds. These thresholds differ between residential and commercial properties.
Unlike Stamp Duty, SDLT is not a voluntary tax. SDLT is a tax on the transaction itself rather than on the form of the document effecting the transaction. In general this has led to increased tax charges in leasehold transactions. A general anti-avoidance provision was introduced a few years after the SDLT regime commenced.
Residential and commercial leases may be subject to additional SDLT upon the rent and this is not always clear at first glance. SDLT is calculated by reference to a formula based upon the annual rent and the length of the contractual term of the lease. The SDLT payable is 1% of the net present value of the rent payable over the term which is discounted at 3.5% per year. If the net present value exceeds the threshold then SDLT is payable upon that excess.
A significant point to note is that if the landlord has opted to tax its interest in the property and therefore charges VAT upon the rent then the amount of VAT payable upon the rent must also be factored into the SDLT calculation resulting in a higher amount of tax to be paid.
The tenant must complete and file an SDLT return (the tenant’s own tax return) and pay all SDLT due within 30 days of the effective date of the land transaction otherwise penalties and interest can accrue. Interest will be charged on the tax due and the penalty will be based upon the period that the payment has been outstanding. If the SDLT due has not been paid within the period of 30 days then there is a fixed penalty of £100 plus interest (if chargeable). If it is overdue by not less than three months but not more than one year then the penalty is £200 plus interest (if chargeable). If the payment is late by over one year then the penalty can be equal to the SDLT due together with interest (if chargeable).
The effective date is key to the triggering of the SDLT liability. The effective date of a land transaction is generally the date of completion of the lease. However, substantial performance before the lease is completed can bring forward the effective date of the land transaction and therefore bring forward the date by which the SDLT must be paid and the SDLT return lodged with HMRC. Substantial performance can take place at the earliest of the following:-
- When payment of all or substantially all of the non-rental consideration is paid (ie lease premium);
- When the tenant takes possession of the whole or substantially the whole of the property pursuant to an agreement for lease (whereby the contract is deemed to be substantially performed); and
- When payment of any rent is made.
However there is no hard and fast rule in relation to the above and it will be necessary to consider the facts in each case. As a general guide payment of substantially all of the consideration usually means payment of 90% or more but this is not absolute.
Lawyers acting upon lease transactions for tenants will usually advise upon the amount of SDLT due. They will, if so instructed, prepare the SDLT return upon the tenant’s behalf and lodge the same (and pay any SDLT due) on behalf of the tenant. When the SDLT return has been filed this will produce a certificate which shall need to be supplied to the Land Registry before the lease (if registerable) can be registered. It is important therefore when taking a lease of land that appropriate advice is obtained to ensure that the correct procedure is followed and time limits adhered to so as to avoid penalties and interest accruing and to ensure that legal title is obtained at the Land Registry. However, SDLT is a tax on land transactions and not just purchases and leases and therefore appropriate advice should be obtained when involved in a transaction affecting land.
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