HMRC SDLT: SDLTM19065 – Variation of leases: Reducing the term: Example

Understanding Stamp Duty Land Tax for Lease Variations

What is Stamp Duty Land Tax (SDLT)?

Stamp Duty Land Tax (SDLT) is a tax that you may need to pay when you buy a property or land over a certain value in England and Northern Ireland. This tax applies not just to the purchase of freehold properties but also to leasehold agreements, which can have specific rules, especially when leases are altered.

When does SDLT apply to leases?

SDLT comes into play when you create a new lease, take on an existing lease, or when the terms of an existing lease are varied. Here are some key points to remember:

New Leases: If you are creating a new lease, you must assess the total rent payable over the duration of the lease to determine if SDLT is due.
Existing Leases: If an existing lease is being transferred or assigned, SDLT may also apply if the rent or other payments change.
Variations to Leases: Changes to the agreements of a lease can trigger SDLT.

Examples of Lease Variations and SDLT

To clarify how SDLT applies to lease variations, consider the following situations:

Example 1: Changing the Lease Terms

Imagine you have a 10-year lease on a shop with an annual rent of £10,000. If you and your landlord agree to extend the lease by an additional 5 years but maintain the same yearly rent, SDLT will not be applicable. This is because the total rent of the new lease remains the same.

However, if you renegotiate and increase the rent to £12,000 per year, then SDLT will apply. The total rent for the full lease duration is now higher, which qualifies for SDLT.

Example 2: Shortening the Contract Duration

Consider a scenario where you have an existing lease of 20 years remaining with a rent of £5,000 per year. If you decide to shorten the lease term to 10 years without changing the rent, SDLT still doesn’t apply.

Conversely, if your lease is shortened, but you increase the rent to £6,000 per year, then SDLT will be calculated on the total new rental amount.

Calculating SDLT for Lease Variations

When assessing the amount of SDLT you need to pay for lease variations, you should consider the following:

Annual Rent: The yearly payment made for the lease.
Length of Lease: Total duration for which you will pay this rent.
The Total Rent: This is calculated by multiplying the annual rate by the length of the lease.

Now, if there is a premium (an upfront payment made to the landlord), this must also be factored into your calculations.

SDLT Rates

SDLT rates vary depending on the amount you need to pay. The main rates are:

Thresholds: No SDLT is payable on amounts below certain thresholds. As of the latest guidelines, if the total rent over the lease term is less than £125,000, no SDLT is payable.

Beyond that, the rates increase depending on the total value:

– 0% on the first £125,000
– 2% on the next £125,000 (from £125,001 to £250,000)
– 5% on amounts over £250,000

It is important to confirm the current rates since they may change over time.

Examples of SDLT Calculation

Here are some practical calculations to illustrate how SDLT works in different scenarios.

Example 3: New Lease Calculation

Assume you take a lease for 15 years at an annual rent of £15,000, with a premium payment of £10,000.

– Total Rent Calculation:
– £15,000 (annual rent) x 15 years = £225,000
– Plus the premium of £10,000
– Total = £225,000 + £10,000 = £235,000

Now, applying the SDLT rates:
– The first £125,000 is at 0% = £0
– The next £125,000 (from £125,001 to £250,000) is 2%
– Calculate = £235,000 – £125,000 = £110,000 x 2% = £2,200

The total payable would be £2,200 in SDLT.

Example 4: Extending a Lease Calculation

If you have an existing lease for 10 years with a rent of £10,000 and you extend it for another 5 years at the same rent:

– Total Rent Calculation:
– £10,000 x 15 years = £150,000

Since the total lease remains below the £125,000 threshold over 15 years, no SDLT is payable.

Exemptions and Reliefs

Sometimes, SDLT does not need to be paid, or you may qualify for relief. Some examples include:

Charitable Relief: If the property is for charitable use, it may be exempt from SDLT.
First-time Buyers: They may receive relief under certain conditions.
Negotiated Agreements: Sometimes negotiations may include terms that help avoid SDLT.

It is important to understand if your situation might qualify for any of these exemptions.

Common Mistakes with SDLT on Lease Variations

Navigating the rules around SDLT can be complex, and mistakes can happen. Here are some common pitfalls to avoid:

Assuming No SDLT for All Lease Changes: Many people think that since they are only extending or varying a lease, SDLT does not apply. Always check if there are changes in rent or lease duration.
Failing to Include Premiums in Calculations: If a premium is charged for the lease, it must be included in your SDLT calculations.
Not Keeping Records: Ensure that you maintain accurate records of your transactions and any agreements made with landlords for your future reference.

Submitting Your SDLT Return

If you are required to pay SDLT, you will need to file a return with HMRC. This can be done online or using a paper form. You must do this within 14 days of the lease completion date to avoid penalties.

– Collect all related leasing documents.
– Complete the SDLT return accurately, reflecting all relevant amounts.
– Submit and pay due SDLT on time to avoid fines.

To assist you in filling out your SDLT return, HMRC offers various forms and guidance online.

Additional Resources

For more detailed information on SDLT and its application to lease variations, you can refer to the following references:

– For specific technical guidance, visit SDLTM19065 – Variation of leases: Reducing the term.
– To understand other technical points related to SDLT, consider looking into additional SDLT guidance provided by HMRC on their main website.

Checking official HMRC resources is advisable to ensure you have the most up-to-date information and to confirm your specific details concerning SDLT in your situation.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM19065 – Variation of leases: Reducing the term: Example

Search Land Tax Advice with Google Site Search

I am here to help. I offer free expert advice to help you understand your land tax obligations, rights, and entitlements.

Our fees come from no-win, no-fee stamp duty claims, and advice to lower your land tax liability under some circumstances.

Contact me below

Speak with Nick Garner

To discuss your stamp duty rebate case
call today:
0204 577 3323

Written by Land Tax Expert Nick Garner.
See free excerpts here.