Read the original guidance here:
HMRC SDLT: SDLTM11015 – Chargeable Consideration: Rent: Inclusive of services etc

SDLTM11015 – Chargeable Consideration: Rent: Inclusive of Services

This article explains how service charges work in relation to rent and Stamp Duty Land Tax (SDLT). Understanding this is important for anyone involved in rental agreements or leases, particularly landlords and tenants.

What are Service Charges?

Service charges are payments tenants make to their landlords to cover services used during the lease period. These services may include maintenance, cleaning, or other costs related to the property. However, service charges are not classed as rent, and for SDLT purposes, they are not counted as part of the taxable amount, known as chargeable consideration. There are specific rules for how these payments are treated when calculating SDLT, which we will explain below.

When are Service Charges Excluded from Tax Calculation?

Service charges are excluded from the SDLT calculation if one of the following conditions applies:

• The lease states the service charge as a separate amount.
• The service charge is included in the total rent figure and is fairly divided on a reasonable basis.

It is important to note that simply because a lease mentions a service charge along with rent does not automatically mean that the service charge is considered rent for SDLT purposes.

Apportionment Explained

Apportionment is the process of dividing the total amount payable between rent and service charges. For SDLT purposes, this division must be reasonable and fair. Just because a lease might outline a different apportionment does not mean it will be accepted for tax calculation. The key is that the apportionment must reflect what is just and reasonable according to SDLT guidelines.

Single Amount Payments

If a tenant makes a single payment that covers both rent and service charges without a clear division between the two, and:

• No individual amounts for rent and service charge are specified in the lease.
• The lease does not treat the service charge as a separate item.

Then the entire amount paid will be treated as rent when calculating SDLT.

Service Charges as Non-chargeable Consideration

Service charges are a common form of non-chargeable consideration. However, the principles mentioned above also apply to other types of non-chargeable consideration. For further information, refer to relevant legislative guidance in FA03/SCH17A/PARA6.

Key Reference Points

For more details on fair apportionment, check FA03/SCH4/PARA4. More information on non-chargeable consideration can be found in SDLTM11060.

Examples of How Service Charges Work

Example 1

In this example, a lease states that the rent is £1,000 per month. The landlord has indicated that this amount includes payment for services; however, this is not written clearly in the lease document.

Since the service charge is not identified separately, and no specific arrangement for it is mentioned in the terms of the lease, the whole £1,000 is treated as rent for SDLT purposes. The service charge does not qualify for exclusion from this rent amount.

Example 2

Here, the lease terms specify a rent of £1,000 per month, clearly including services. However, no separate apportionment between rent and service charges is defined.

Though the rent includes services, a just and reasonable division must still be made. This apportionment does not need to be explicitly shown in the lease but must be detailed in the SDLT return. Keeping documentation explaining how this apportionment was reached is important in case the tax authorities request clarification.

Example 3

Consider a lease stating a monthly rent of £1,000, which includes £200 for services. In this case, the £200 for services is considered fair when compared to the market rent for a similar property that typically would cost £800 without services.

Even though the entire £1,000 is classified as rent, since there’s a clear amount set aside for services and this division is deemed just and reasonable, for SDLT purposes, only £800 is considered rent.

Example 4

In this scenario, the lease states a rent of £2,000 per month that includes £1,200 allocated for services. The market rent for a comparable property without services would be £1,800 with an additional £200 covering services.

Even though the £2,000 is divided into rent and service charges, the proportion of £1,200 for services is not seen as just and reasonable based on market standards. In such situations, SDLT regulations require the tax calculation to reflect a fair distribution of the amounts involved. Hence, a reasonable amount of £200 for services is accepted, and £1,800 is recognised as rent.