Read the original guidance here:
HMRC SDLT: SDLTM33800 – Chargeable consideration includes rent – Para19, example

Understanding Chargeable Consideration in Property Lease Transfers

When transferring property leases, it is essential to calculate the chargeable consideration. This means determining how much Stamp Duty Land Tax (SDLT) the transaction may involve. The following points explain key ideas about how to work this out using a specific example.

Key Concepts

Chargeable Consideration: This is the total amount that is considered when calculating SDLT. It includes both premium (the upfront payment) and the present value of the rent over the lease term.

Net Present Value: This represents the current value of future rental payments, discounted back to present value terms.

SDLT Thresholds: There is a specific value amount in property transactions that dictates whether SDLT needs to be paid. If the chargeable consideration is below a certain threshold, no tax is due, whereas a tax may be required for amounts above.

Example Scenario

Let’s look at a practical example involving a partnership and one of its partners to clarify these concepts:

– A partnership has three partners, including Partner A.
– Partner A receives a lease for non-residential property.
– Partner A previously owned 25% of the partnership income profits and is not connected to the two other partners for tax purposes.
– After the transfer, Partner A’s interest increases to 100%.

Calculating Chargeable Consideration

In this example, we need to calculate the chargeable consideration for the lease transfer:

1. Calculating Lower Proportions:
– The lower proportion based on the partnership’s ownership before the transfer is 25% (as calculated under paragraph 20 of the guidance).

2. Net Present Value of Rents:
– The net present value of the rents is determined to be £100,000.

3. Premium on Lease Grant:
– A premium of £240,000 was established for granting the lease. It is important to note that this amount reflects market value.

Now, let’s break down the chargeable consideration based on these details:

Chargeable Consideration Calculation:

– Market Value of the Premium Calculation:
– Formula: Market value of the premium x (100 – SLP)%
– Calculation:
– 240,000 x (100 – 25)% = 240,000 x 75% = 180,000

The £180,000 represents the chargeable consideration based on the premium.

– Net Present Value of Rents Calculation:
– Formula: Relevant chargeable proportion of the net present value of the rents.
– Calculation:
– 100,000 x (100 – 25)% = 100,000 x 75% = 75,000

The rental element value is £75,000.

Understanding SDLT Based on Chargeable Consideration

There are thresholds for SDLT that apply to these calculations. The current threshold for non-residential properties is £150,000. With this in mind:

1. Assessment of SDLT on Premium:
– Since the chargeable consideration is £180,000, which exceeds the threshold, SDLT is due on the difference:
– 180,000 – 150,000 = 30,000
– SDLT is assessed at a rate of 2%, resulting in:
– SDLT on £30,000 at 2% = £600.

2. Assessment of SDLT on Rental Element:
– The rental amount of £75,000 is also below the £150,000 threshold and therefore is not liable for SDLT.

3. Total SDLT Due:
– The total SDLT due on this transaction is the sum from the premium consideration, which is £600.
– The rental amount does not add any liability since it falls below the threshold.

Summary of Charges in Example

– SDLT due on the premium segment: £600
– SDLT due on the rental element: £0
– Total SDLT payment = £600

This example illustrates how to calculate the chargeable consideration for a lease of non-residential property, taking into account both the premium and net present value of future rents. By following these steps, property owners can effectively determine their tax obligations under SDLT regulations.

Conclusion

By understanding these principles and calculations, anyone involved in property leasing can better navigate the complexities of SDLT. The example provided serves as a clear guide to apply in real-world situations.