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Commercial property and stamp duty land tax – the misconceptions

Posted on 10th February, 2020

There are two issues that usually cause a client to glaze over in a property transaction these being (1) Commercial Property Standard Enquiries (CPSE’s) and (2) stamp duty land tax (SDLT) considerations!

I too have glazed over at the prospect of reporting to you on CPSE’s therefore I’m seizing the opportunity to report to you on some common SDLT misconceptions in the hope that there can be greater understanding of SDLT issues in property transactions.

Misconception 1.

I’m often contacted by clients dealing with lease transactions to query the need for a stamp duty land tax return when my client is “buying” the property and is “only taking a lease”. This is one of the most common misconceptions with SDLT and commercial property – SDLT does apply to some leasehold transactions and it is not simply the position that only freehold transactions result in a requirement to pay SDLT. HMRC publishes a useful leasehold SDLT calculator which we also use which provides confirmation as to the SDLT figure applicable to a leasehold transaction using a formula based on the term of years of the lease and any premium or annual rent payable.

Misconception 2.

Another misconception is the relationship between SDLT and VAT. It is often not recognised that SDLT is calculated on the VAT inclusive sum of the rent payable under a lease or on the price paid for a property where it is a long lease or a freehold. It is important therefore to establish at the outset of a transaction whether the landlord or vendor (as the case may be) has opted the property the subject of the transaction to VAT. This means that the landlord or vendor (as the case may be) has notified HMRC of an election to charge VAT on its property asset. Where the landlord or vendor has made such an election, the tenant or purchaser should request sight of the option to tax notification from HMRC. If an option to tax notification is in existence then the landlord or vendor is obliged to charge VAT on the lease rent or the purchase price of the property (as the case may be). The SDLT payable in respect of the transaction is then calculated on the VAT inclusive sum. You’re now probably thinking that “surely this can’t be right, that’s a tax on tax isn’t it?”. It is indeed. Take note!

Misconception 3.

In the commercial property team we often act for companies in connection with the acquisition of residential properties. We’re often asked by our clients whether, as the purchase of a residential property is by a corporate entity, the commercial SDLT rates can apply to the transaction rather than the residential rates. This is due to the fact that there are different SDLT thresholds applicable to the purchase of properties which attract the commercial SDLT rate. Unfortunately that’s not possible. HMRC takes into consideration the type of property being acquired in determining whether SDLT is payable at the residential or commercial rates and not the purchasing entity. A caveat to this however is that where a company is purchasing a residential property a higher rate of residential SDLT will apply to the purchase (the SDLT surcharge).

Misconception 4.

In the current commercial property market we frequently encounter leases which include tenant break clauses. It’s presently uncommon to see a tenant take a lease for a term of say 20 years with no opportunity to terminate early. In these circumstances it’s often the position that we’re asked by tenant clients whether, if the lease terminates early by the exercise of the tenant break, the tenant is entitled to a refund of any SDLT paid on the grant of the lease. Whilst this seems reasonable, rather unsurprisingly, HMRC forms a different view! SDLT is calculated on the basis of the full contractual term of the lease and no account is taken of a break clause which would entitle the tenant to a refund on SDLT paid.

I’ve only scratched the surface with the points above but you’ll see that SDLT is a minefield and, whilst not particularly thrilling, does need to be considered in detail on every property transaction.

Erica Turner, Partner and Head of Commercial Property

 

 

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