HMRC SDLT: SDLTM18040 – Chargeable Consideration: ‘Premium’ payments
Principles and Concepts of Chargeable Consideration
This section of the HMRC internal manual provides guidance on ‘Premium’ payments as chargeable consideration. It outlines the principles and concepts related to these payments, which are essential for understanding tax liabilities.
- Defines ‘Premium’ payments in the context of chargeable consideration.
- Explains how these payments affect tax calculations.
- Provides examples to illustrate the application of these principles.
- Clarifies the legal framework governing chargeable consideration.
Read the original guidance here:
HMRC SDLT: SDLTM18040 – Chargeable Consideration: ‘Premium’ payments
SDLTM18040 – Chargeable Consideration: ‘Premium’ Payments
When buying land or property, the amount of tax you need to pay is based on the chargeable consideration. One important aspect of this is the ‘premium’ paid for certain types of property transactions. This article explains what is meant by ‘premium’ payments, how they work, and what you need to keep in mind when calculating tax.
Understanding Chargeable Consideration
Chargeable consideration is the total amount you pay or anything you provide as part of a property transaction. It usually includes:
- Money paid for the property
- Value of any additional benefits provided, such as services or rights
- Any liabilities taken on, such as mortgages or loans
In simple terms, it’s the total value involved in buying a property or land, used to determine the amount of stamp duty land tax (SDLT) you have to pay.
What is a ‘Premium’ Payment?
A ‘premium’ is typically an extra payment made for specific rights or benefits in a lease or tenancy agreement. This is not just the standard rent payment; it’s a special one-off payment that gives you additional rights. Here are some examples:
- In a commercial property lease, if you pay a premium to secure a longer lease, that amount is a premium.
- If you buy a leasehold flat and pay a one-off amount to get the right to extend the lease, this is also considered a premium.
It’s important to remember that not all payments in a property transaction are classified as a premium. The payment must be specifically for rights that enhance your position or give you additional benefits.
How Premium Payments Affect SDLT Calculations
When you calculate SDLT, the total chargeable consideration must include any premium payments. This means that if you make a premium payment as part of your property transaction, this amount must be added to the total value before calculating SDLT. Here’s how it works:
- If you purchase a property for £300,000 and pay an additional premium of £50,000 to extend the lease, your total chargeable consideration is £350,000.
- If the chargeable consideration reaches certain thresholds, this will determine the applicable SDLT rates.
Examples of Premium Payments in Detail
Let’s look at two scenarios involving premium payments to clarify how they affect SDLT:
Example 1: Commercial Lease
You are entering a commercial property lease where the annual rent is £20,000. In addition to this rent, you agree to pay a one-off premium of £100,000 to secure a favourable location. Your total chargeable consideration would be:
- Annual rent: £20,000
- Premium payment: £100,000
- Total chargeable consideration: £20,000 + £100,000 = £120,000
In this case, when calculating the SDLT, you would base it on the total of £120,000.
Example 2: Residential Lease Extension
You own a leasehold flat with a remaining lease period of 50 years. You want to extend the lease and pay a premium of £30,000 for this extension. In this case:
- Property market value: £250,000
- Premium payment: £30,000
- Total chargeable consideration: £250,000 + £30,000 = £280,000
Again, here, the SDLT would be calculated on the total of £280,000 considering the premium.
Factors to Consider When Paying a Premium
When dealing with premium payments, here are some important aspects to consider:
- Documentation: Always ensure you have proper documentation that outlines the premium agreement. This will help in case of audits or questions from HMRC.
- Value Justification: Be prepared to justify the premium amount. It should reflect a real value for the rights or benefits being acquired.
- Market Comparisons: Consider looking at market bench data to ensure your premium amount is reasonable in comparison to similar transactions.
Special Cases Involving Premium Payments
In certain situations, premiums can have different implications. Here are a couple of factors that may change how premiums are viewed in SDLT terms:
Transactions Involving Related Parties
If you are buying a property from a family member or friend, and a premium is involved, it is particularly important to ensure that the premium reflects fair market value. HMRC may scrutinize related-party transactions more closely.
Discounted Premiums
Sometimes, a premium may be discounted due to certain conditions, such as being a less favourable lease or being part of a larger acquisition. In these situations, it’s essential to provide adequate evidence of how the discount was determined to justify the premium’s value.
How to Submit SDLT Returns Including Premium Payments
When you complete your SDLT return, make sure to include the premium payment as part of your total chargeable consideration. This is key to ensuring your SDLT is calculated correctly. Follow these steps:
- Calculate your total chargeable consideration, including any premiums.
- Use the appropriate SDLT rates based on this total.
- Submit your SDLT return to HMRC, ensuring you include details of the premium payment and any related documentation.
Final Points on Premium Payments in SDLT
Understanding how premium payments work is vital for anyone involved in property transactions. It ensures that all necessary payments are properly reported and that the correct amount of SDLT is paid. When navigating property deals, being aware of these aspects can help you avoid potential issues with HMRC.
For more specific situations or questions regarding your circumstances, consider seeking assistance from a tax professional or legal advisor to ensure compliance and accuracy in your SDLT calculations.
For more detailed information, refer to the HMRC guidelines or specific SDLT guidance pages such as SDLTM0000.