HMRC SDLT: SDLTM18760 – Term of a lease: Minute of variation to extend the term of a lease: Example 1

Principles and Concepts of Lease Term Extension

This section of the HMRC internal manual provides guidance on extending the term of a lease through a minute of variation. It includes an example to illustrate the process.

  • Explains the legal framework for lease term extension.
  • Details the procedural steps involved in drafting a minute of variation.
  • Provides an example to clarify the application of these principles.
  • Emphasises compliance with HMRC regulations.

Understanding Stamp Duty Land Tax (SDLT)

Stamp Duty Land Tax (SDLT) is a tax paid when you buy property or land over a certain price in England and Northern Ireland. This guidance explains key aspects of SDLT, including what it is, how it works, and important considerations when dealing with property transactions.

What is SDLT?

SDLT is a tax that applies to various types of property transactions. The basic idea is that when a buyer purchases land or property worth over a set amount, they must pay a percentage of the property’s price as tax. This tax is paid to HM Revenue and Customs (HMRC).

When and How is SDLT Charged?

SDLT is charged on the value of the land or property you are buying. The rules on how much you need to pay depend on the purchase price and whether any exemptions apply. Here are the key elements:

  • Purchasing Residential Property: If you buy a residential property in England or Northern Ireland for more than £125,000, SDLT applies. The amount you pay increases with the price of the property.
  • Purchasing Non-Residential Property: For non-residential properties, SDLT applies on purchases over £150,000.
  • Higher Rates on Additional Properties: If you are buying an additional residential property, such as a second home or a buy-to-let property, you’ll need to pay a higher rate of SDLT. This is usually 3% on top of the standard rates.

SDLT Rates and Bands

The rates you pay depend on property price bands. Here’s a simplified breakdown of current rates for residential properties:

  • £0 – £125,000: 0%
  • £125,001 – £250,000: 2%
  • £250,001 – £925,000: 5%
  • £925,001 – £1.5 million: 10%
  • Over £1.5 million: 12%

For instance, if you buy a house for £300,000:

  • The first £125,000 is tax-free.
  • The next £125,000 (from £125,001 to £250,000) is taxed at 2%, which amounts to £2,500.
  • The final £50,000 (from £250,001 to £300,000) is taxed at 5%, which adds another £2,500.

The total SDLT to be paid would then be £5,000 (£2,500 + £2,500).

Exemptions and Reliefs

There are some instances where SDLT may not apply or may be reduced. Here are some examples:

  • First-Time Buyers Relief: First-time buyers purchasing a property under £500,000 may not have to pay SDLT on the first £300,000. This relief helps first-time home buyers manage costs more effectively.
  • Transfers of Property: Transfers that occur as part of a divorce settlement or a transfer between spouses or civil partners can also be exempt from SDLT.
  • Charitable Exemptions: Transfers of property to registered charities under certain conditions are usually exempt from SDLT.

Paying SDLT

Once you have completed your property purchase, you are responsible for paying SDLT. Here’s how to do it:

  • Submitting Your SDLT Return: You must submit an SDLT return to HMRC within 14 days of completing the purchase. The return can typically be completed online.
  • Payment Methods: SDLT can be paid through your solicitor, who may handle the payment as part of the transaction, or you can pay it directly to HMRC.

Ensuring your return is accurate and submitted on time is important to avoid penalties.

Understanding Leasehold Transactions

When you enter into a lease for property, SDLT may also apply. Here’s what to keep in mind for leasehold transactions:

  • Lease Premium: If you pay a one-off premium for the lease, SDLT will be charged on that amount based on the same bands outlined earlier.
  • Annual Rent: If you are paying an annual rent for the lease, SDLT is also charged based on the rent. For most leases, there are specific rules that determine how SDLT is calculated in this case.

For example, if you lease a commercial property for a premium of £100,000 and pay an annual rent of £10,000, you would pay SDLT on the premium based on the relevant rate as well as on the annual rent amount, if applicable.

Special Cases

Some property transactions may have unique circumstances that require special consideration regarding SDLT:

  • Under- Value Transfers: If you buy property for less than its market value, the SDLT is calculated based on the market value rather than the price you pay. This prevents tax avoidance by selling property below its worth.
  • Buying Mixed-Use Properties: Properties that are both residential and non-residential may be subject to SDLT at different rates. It is essential to determine the appropriate classification of the property when buying.
  • Property Exchanges: When exchanging properties, you may still be liable for SDLT on the transaction if the value exceeds the threshold for SDLT.

Penalties for Non-Compliance

Failing to submit your SDLT return or pay the tax correctly and on time can result in penalties from HMRC. Here are key points about penalties:

  • Late Submission: If you submit your return after the 14-day deadline, you may face an initial penalty along with daily fines until the return is submitted.
  • Incorrect Payments: If you pay less SDLT than required, you may be charged interest on the underpaid amount, plus a penalty.

To avoid issues, it’s best to ensure that your SDLT return is accurate and submitted promptly.

Dealing with SDLT Queries

If you have questions about SDLT, HMRC provides resources to help. Here are a few ways you can get assistance:

  • HMRC Website: The HMRC website has comprehensive information about SDLT, including calculators and further guidance on specific situations.
  • Seek Professional Advice: Consulting with a solicitor who specializes in property transactions can help clarify any complicated issues relating to SDLT.
  • Customer Service: HMRC offers contact details via their website if you require direct assistance with your SDLT enquiries.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM18760 – Term of a lease: Minute of variation to extend the term of a lease: Example 1

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Written by Land Tax Expert Nick Garner.
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