Is SDLT payable when a freeholder pays a leaseholder to surrender a residential lease?

Introduction

A common SDLT question arises where a freeholder pays a leaseholder to give up a long lease so that the flat or house falls back into the freehold title. People often assume that, because the freeholder already owns the reversion, no SDLT is due. In fact, the surrender of a lease can itself be a chargeable land transaction.

This article explains the SDLT position where a company freeholder pays a premium to a residential leaseholder to surrender the lease, and what happens if the freeholder later grants a new long lease to another buyer.

The Question

A company owns the freehold of a building containing two flats. Both flats have previously been sold off on long leases to separate individuals. The company has agreed to pay £155,000 to one leaseholder in return for that lease being surrendered, so the flat returns to the company’s freehold title.

The main questions are:

• Is SDLT payable on the £155,000 paid by the freeholder for the surrender of the lease?
• If the company later grants a new long lease of the flat to a buyer, is that a separate SDLT transaction?

Nick’s Explanation

Nick’s view was that SDLT is payable on the surrender.

In anonymised form, his reasoning was:

“From an SDLT perspective, the surrender of the lease is a land transaction. Section 43(3)(b) of the Finance Act 2003 provides that when a lease is surrendered, the party whose interest is benefitted or enlarged by the transaction is treated as the purchaser.”

He explained that where the freeholder pays £155,000 to the leaseholder to give up the lease, the freeholder is treated as acquiring the leasehold interest that is being surrendered. Because chargeable consideration is being given, SDLT can arise.

He also explained that if the flat is later sold again by granting a fresh long lease, that future grant is a separate land transaction. The incoming leaseholder would then consider SDLT on the price and any relevant rent for that new lease.

The Law

The starting point is Part 4 of the Finance Act 2003.

Under section 43(1) Finance Act 2003, SDLT is charged on land transactions. A surrender of a lease can fall within the SDLT code.

Section 43(3)(b) Finance Act 2003 deals specifically with lease surrenders. It provides that where a lease is surrendered, the person whose interest is benefitted or enlarged by the transaction is treated as the purchaser for SDLT purposes. In a standard surrender back to the landlord, that will usually be the freeholder or superior landlord.

If the freeholder gives chargeable consideration for the surrender, that consideration is the amount on which SDLT is assessed, subject to the normal SDLT rules.

Where the subject matter is residential property, residential SDLT rates apply unless a different statutory rule displaces them.

If the purchaser is a company acquiring a major interest in a single dwelling, Schedule 4ZA Finance Act 2003 may apply so that the higher rates for additional dwellings are charged. In broad terms, a company does not need to own another dwelling for those higher rates to apply. A company purchaser of residential property will often be within the higher rates automatically unless a specific exception applies.

If a new lease is granted later to another buyer, that later grant is a separate land transaction under the SDLT legislation. The buyer under that new lease is the purchaser for that later transaction.

Analysis

The SDLT analysis can be broken down into four steps.

First, identify whether there is a land transaction. A lease surrender is capable of being a land transaction for SDLT purposes. This is not ignored simply because the freeholder already owned the reversion.

Second, identify who is treated as the purchaser. On a surrender, section 43(3)(b) says the person whose interest is benefitted or enlarged is treated as the purchaser. When a lease is surrendered to the freeholder, the freeholder’s interest is enlarged because the leasehold estate falls away and the freehold becomes unencumbered by that lease.

Third, identify the chargeable consideration. Here, the freeholder is paying £155,000 to obtain the surrender. That payment is chargeable consideration for SDLT purposes.

Fourth, apply the correct rates. Because the property is a flat, it is residential property. If the purchaser is a company, the residential higher rates under Schedule 4ZA will usually apply. On the facts given, the company would therefore calculate SDLT using residential rates including the 5% higher rates supplement.

Using the current structure described in Nick’s explanation, a company acquiring a residential interest for £155,000 would generally face SDLT at 5% on the portion up to £125,000 and 7% on the portion from £125,001 to £250,000. On that basis:

• 5% on £125,000 = £6,250
• 7% on £30,000 = £2,100
• Total SDLT = £8,350

That gives a likely SDLT liability of £8,350 on the surrender consideration of £155,000, assuming no relief or special rule changes the result.

The later re-grant of a new long lease does not undo or merge with the earlier surrender transaction for SDLT purposes. It is a separate taxable event. If the company later grants a new lease to a buyer, that buyer would consider SDLT based on the premium paid and, where relevant, any rent under the lease using the normal lease rules.

Outcome

On the facts described, SDLT is likely to be payable now by the company freeholder on the £155,000 paid for the surrender of the residential lease.

The likely result is:

• the surrender is a chargeable land transaction;
• the freeholder is treated as the purchaser under section 43(3)(b) Finance Act 2003;
• the £155,000 paid to the leaseholder is chargeable consideration; and
• because the purchaser is a company acquiring a residential interest, the higher residential rates are likely to apply.

If the flat is later sold by granting a new long lease, that later lease grant is a separate SDLT transaction for the incoming buyer. There is no SDLT “double charge” on the same transaction; there are simply two different land transactions happening at different times.

Practical Steps

If you are dealing with a lease surrender of this kind, it is sensible to check the following before filing the SDLT return:

• Confirm that the property is residential for SDLT purposes.
• Confirm exactly who is acquiring the benefitted interest, especially if there is a group structure or nominee arrangement.
• Check whether the company is acquiring a major interest in a dwelling so that Schedule 4ZA higher rates apply.
• Review whether any reliefs or special rules could apply on the facts.
• Ensure the surrender document and completion statement clearly record the premium paid for the surrender.
• File the SDLT return and pay any SDLT due within the statutory deadline.
• If a new lease will be granted later, treat that as a separate future SDLT exercise rather than assuming the earlier SDLT covers it.

Conclusion

Where a freeholder pays a leaseholder to surrender a residential long lease, SDLT can be payable by the freeholder. The surrender is not ignored for SDLT purposes. If the purchaser is a company, the higher residential rates will often apply. Any later grant of a new lease is a separate transaction, with its own SDLT position for the new buyer.

Legal References Used

• Finance Act 2003, Part 4
• Finance Act 2003, section 43(1)
• Finance Act 2003, section 43(3)(b)
• Finance Act 2003, Schedule 4ZA

This page was last updated on 22 March 2026.

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