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HMRC SDLT: SDLTM11055 – Chargeable Consideration: Deposit and loan arrangements

Chargeable Consideration: Deposit and Loan Arrangements Under SDLT

This article explains how deposits and loans associated with leases are treated for Stamp Duty Land Tax (SDLT) purposes. Key points include how much these amounts can affect the tax due and the circumstances under which they are disregarded. This information will help you understand the important details when dealing with stamp duty in property transactions.

Understanding Chargeable Consideration

Since 19 May 2005, according to legislation, any loan or deposit that a tenant pays can be considered as part of the payment for the lease. Here are the main points to consider:

• When a tenant pays a loan or deposit, even if it’s to someone other than the landlord, the amount may be treated as a premium. A premium is defined as a payment other than rent for the lease.
• The only exception is if the deposit is less than twice the highest annual rent during any continuous 12-month period, which applies during the first five years of the lease. In such cases, this deposit is not counted for SDLT.

Applicability to Assignees

The same rules apply to loans or deposits made by an assignee, which is someone taking over a lease. The maximum rent will be assessed based on the highest amount due during the first five years left on the original lease, as of the assignment date.

Calculating SDLT

When determining SDLT, the entire amount of this notional premium is considered, without accounting for any repayment of the loan or deposit.

Examples of Chargeable Consideration

Here are some practical examples to help clarify how these rules apply:

Example 1: Non-Residential Property Lease

A lease for a non-residential property is granted on 1 June 2015. It lasts for 10 years, with an annual rent of £50,000, and includes a rent review on 1 June 2020. The tenant pays a deposit of £25,000 upon signing the lease.

• In this case, the relevant maximum rent is £50,000, which is the annual rent amount.
• Since the deposit of £25,000 is less than twice this maximum rent (£100,000), it does not count as additional consideration.
• Therefore, SDLT is only applicable on the net present value of the rent.

Example 2: Residential Lease with Low Premium

A residential lease starts on 1 June 2017, with a premium of £60,000 for 99 years and an annual rent of £1,000. The tenant also pays a rent deposit of £5,000.

• The premium of £60,000 falls within the 0% tax rate as it is not over the residential exemption threshold.
• The deposit of £5,000 is considered a security payment for service charges, which means it is not counted as a premium because it does not exceed twice the relevant maximum rent of £1,000.
• The total consideration does not exceed the residential threshold, so there is no SDLT.

Example 3: Residential Lease with Higher Premium

A separate residential lease is granted on 1 June 2017 for a premium of £115,000 and an annual rent of £1,000. The tenant also pays a rent deposit of £15,000.

• Here, the deposit of £15,000 is more than twice the relevant maximum rent of £1,000. So, it counts as a premium for lease purposes.
• The total consideration is the premium of £115,000 plus the notional premium of £15,000, giving a total of £130,000.
• Since this total surpasses the residential threshold of £125,000, SDLT applies at a rate of 2% on the chargeable consideration.
• However, the net present value of the rent is still below the residential threshold, meaning it is not subject to tax.

Example 4: Non-Residential Lease with High Deposit

A lease for a non-residential property starts on 1 June 2017 for a 15-year term with an annual rent of £15,000. The tenant pays a deposit of £200,000 at the time the lease is granted.

• The relevant maximum rent is £15,000, the annual rent for this lease.
• Since the deposit of £200,000 is significantly more than twice the relevant maximum rent (£30,000), it is considered a disguised premium and is taxable.
• This deposit also exceeds the 0% threshold for non-residential properties, making it chargeable under SDLT.

Key Takeaways

Understanding how deposits and loan arrangements factor into SDLT is essential for anyone involved in property leases. The treatment of these amounts can vary based on their relation to the rent and the thresholds in place. It is important to calculate and assess these figures properly to ensure compliance with tax laws.