Example of SDLT on Substantial Performance of Non-Residential Lease Agreement

SDLT where an agreement for lease is substantially performed before the lease is granted

If a tenant takes possession or otherwise substantially performs an agreement for lease before the formal lease is granted, SDLT may arise earlier than expected. HMRC’s approach is that, if the lease term is still uncertain at that stage, the agreement may be treated as a one-year notional lease, with a further SDLT calculation when the actual lease is later granted, making sure the same rent period is not taxed twice.

• An agreement for lease can trigger SDLT before the formal lease is completed if it has been substantially performed.
• If the future lease start date is not yet known, HMRC may treat the agreement as being for an indefinite term and apply a one-year notional lease for SDLT purposes.
• Any SDLT due on that notional lease must be notified within 30 days of substantial performance.
• When the actual lease is later granted, it is treated as linked with the notional lease and SDLT is recalculated using the now certain term.
• The rent already taxed under the notional lease must be left out of the later calculation so that overlapping rental periods are not charged twice.
• This timing issue can catch parties out because the first SDLT filing obligation may arise well before the lease document is formally granted.

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SDLT on an agreement for lease that is substantially performed before the lease is granted

This page explains what happens for SDLT if an agreement for lease is acted on before the formal lease is actually granted. The HMRC example deals with a common timing problem: the tenant takes possession or otherwise substantially performs the agreement first, and the lease document is completed later. In that situation, SDLT can arise twice in a connected way: first on a notional lease at the point of substantial performance, and then again when the real lease is granted, with an adjustment to prevent the same rental period being taxed twice.

What this rule is about

For SDLT, an agreement for lease can itself trigger tax if it is substantially performed before the lease is formally granted. Substantial performance usually matters because SDLT is charged by reference to when a land transaction is completed, but in some cases the law brings the tax point forward.

Where the agreement has been substantially performed but the actual lease has not yet been granted, the law may treat there as being a temporary or notional lease. That matters because SDLT on leases is often calculated by reference to the net present value of the rent over the term.

The difficulty in this HMRC example is that, at the date of substantial performance, the eventual start date of the actual lease term is still not known. That means the term cannot yet be stated with certainty.

What the official source says

HMRC’s example says that where a non-residential agreement for lease is exchanged on 1 January 2015, substantially performed on 1 February 2015, and the actual lease is granted on 1 May 2015, SDLT must first be considered at the date of substantial performance.

At that point, because the lease term is described as 10 years from the date the lease is to be granted, and that grant date is not yet known, the agreement is treated as being for an indefinite term. HMRC says that this means it is treated as a notional lease for a term of one year.

SDLT is then payable on that notional lease to the extent that the net present value of the rent exceeds the relevant threshold. If tax is payable, the transaction must be notified within 30 days after substantial performance. In HMRC’s example, that means by 2 March 2015.

When the actual lease is later granted on 1 May 2015, HMRC says that this is a linked transaction with the notional lease created on substantial performance. A further notification is required because the single lease, viewed as the combination of the notional lease and the actual lease, now has a certain term. SDLT is then due on the rent that has not already been taken into account.

HMRC also explains how overlap is dealt with. The same rental period should not be counted twice. In the example, overlap relief is not something separately claimed by ticking a box. Instead, the return should include only the part of the first year’s rent under the actual lease that falls outside the period already covered by the notional lease.

On HMRC’s figures, the notional lease runs from 1 February 2015 to 31 January 2016. The actual lease begins on 1 May 2015. The overlapping period is therefore 1 May 2015 to 31 January 2016. The non-overlapping part of the first year of the actual lease is 1 February 2016 to 30 April 2016, which is 89 days. HMRC therefore takes year 1 rent for SDLT purposes as £51,205, being £210,000 multiplied by 89/365. The rent for the rest of the term is taken as £210,000 per year.

What this means in practice

The practical point is that substantial performance can create an SDLT filing and payment obligation before the lease document exists.

If the future lease term cannot yet be fixed at that stage, HMRC’s approach in this example is to treat the arrangement as a one-year notional lease. That gives a basis for calculating SDLT at the earlier date.

Once the real lease is granted, you do not ignore the earlier notional lease. Instead, the two are linked and must be looked at together. You then recalculate by reference to the actual lease term, but without charging SDLT twice on the same period of rent.

This is important for conveyancers and taxpayers because the first SDLT deadline may arise well before completion of the formal lease. Missing that earlier filing point could create compliance problems even though the parties may think the transaction is still only at agreement stage.

How to analyse it

A sensible way to approach this kind of case is:

• Identify whether there is an agreement for lease rather than a completed lease.
• Ask whether that agreement has been substantially performed before the lease is granted.
• Work out whether, at the date of substantial performance, the term of the future lease is certain or indefinite.
• If it is indefinite in the sense used in HMRC’s example, consider the notional one-year lease treatment.
• Calculate SDLT on that basis, using the rent attributable to the notional lease and checking whether the NPV exceeds the threshold.
• Check whether a return is required at that stage and the filing deadline running from substantial performance.
• When the actual lease is later granted, treat it as linked with the notional lease and revisit the SDLT position.
• Make sure the rental periods already taxed under the notional lease are not counted again when calculating SDLT on the actual lease.

The key analytical question is not just “when was the lease signed?” but “when was the agreement for lease substantially performed, and what could be known about the lease term at that time?”

Example

Illustration based on HMRC’s example:

A tenant agrees to take a 10-year non-residential lease, but the 10-year term will only start when the formal lease is granted. The parties exchange the agreement on 1 January. The tenant goes into possession on 1 February, so the agreement is substantially performed then. The lease is not actually granted until 1 May.

On 1 February, the eventual lease commencement date is still unknown. HMRC therefore treats the arrangement as an indefinite-term agreement and applies the one-year notional lease treatment. SDLT is considered at that point by reference to that one-year notional lease.

When the lease is granted on 1 May, the actual lease and the notional lease are linked. The final SDLT calculation must exclude the part of the first lease year already covered by the notional lease period. In HMRC’s example, only the period from 1 February 2016 to 30 April 2016 is brought in as the first year’s rent for the actual lease calculation, because the earlier period overlaps with the notional lease already taken into account.

Why this can be difficult in practice

The main difficulty is timing. Parties often focus on the formal grant of the lease, but SDLT can be triggered earlier by substantial performance.

Another difficulty is understanding what counts as the relevant term at the substantial performance date. In this example, HMRC treats the agreement as being for an indefinite term because the start date of the actual lease is not yet known. That conclusion matters because it leads to the one-year notional lease treatment.

A further practical difficulty is the overlap calculation. HMRC’s point is that overlap relief is achieved through the figures returned, not by making a separate claim or simply answering a return question in a particular way. The person preparing the return must identify exactly which rental periods have already been taxed and exclude those from the later calculation.

Cases involving rent reviews can also be awkward. HMRC’s example mentions a market rent review at the end of year 5, but the example itself is focused on the timing and overlap issue rather than giving a broader explanation of how every future variable should be handled. Care is needed to keep separate the question of when SDLT is triggered from the question of how rent is valued over the lease term.

Key takeaways

• An agreement for lease can trigger SDLT before the lease is formally granted if it is substantially performed.
• If the lease term is still indefinite at that point, HMRC’s example treats it as a one-year notional lease.
• When the actual lease is granted, it is linked with the notional lease and the SDLT calculation must avoid taxing the same rental period twice.

This page was last updated on 24 March 2026

Useful article? You may find it helpful to read the original guidance here: Example of SDLT on Substantial Performance of Non-Residential Lease Agreement

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