Understanding Stamp Duty Land Tax (SDLT) on commercial properties is crucial for investors, business owners, and real estate professionals.
One common question is: are commercial property leases subject to SDLT? The answer is yes, but it’s a fairly complex topic.
SDLT is a tax levied on property transaction and applies to non-residential properties when the value of the transaction exceeds £150,000, although returns are required to be sent to HMRC if the value is more than £40,000 (save in the case of leases of less than 7 years), even if no duty is payable.
There is no reference to “commercial property” in the SDLT regulations, but rather if a property is not deemed to be a residential “Dwelling” under the regulations, then the rules relating to non-residential SDLT apply.
So, the non-residential rules will apply to all types of land and commercial properties including office buildings, retail spaces, warehouses, industrial sites and bare land.
Additionally, mixed-use properties, which combine residential and non-residential/commercial elements, will be treated as non-residential but we this is an incredibly complex area that we cannot cover here, but would be more than happy to talk to you about this if you have any questions.
The calculation of SDLT for commercial leases is based on any lease premium the tenant pays and the rent due under the lease terms, which may include VAT if applicable; yes, you read that correctly; you will pay SDLT on the VAT element of the rent.
The SDLT payable depends on the lease’s “Net Present Value” (NPV), which is calculated by reference to the lease length and the total rent over the term of lease.
For leases longer than five years, the NPV calculation is based on the highest rent paid over any 12-month period during the first five years.
However, it’s crucial to note that regardless of whether SDLT is payable, an HMRC return is still going to be needed if your new lease is for a term of more than seven years, unless you pay a premium of less that £40,000 and the rent is less than £1000, which is unlikely nowadays. If your lease is for less than seven years, no return will be required unless the NPV is more than £150,000 (at current rates).
In addition, the SDLT implications can change over the lease term. For example, if a lease is extended or renewed or if a rent review results in a change in the rent amount, this could affect the SDLT liability and so you must always go back and review the calculation in such circumstances.
The SDLT rates for commercial properties are structured in tiers.
The first £150,000 of any transaction value (including the NPV of a lease) does not attract any SDLT. The next £100,000 (i.e. between £150,000 and £250,000) is charged at 2% and the remaining value is charged at 5%.
It is important to calculate the SDLT at the outset of the transaction so that you can budget for it.
Certain transactions may qualify for exemptions or relief from SDLT. These can include property transfers to a charity or in specific corporate restructuring scenarios.
If you think that your transaction will be eligible for any such relief, it would be essential to consult with a tax professional to make sure that you meet any necessary eligibility criteria
If you are thinking about taking on a commercial lease, or any commercial property, please contact us to find out more.