Do you pay SDLT when surrendering a lease back to the freeholder?

Introduction

Leaseholders sometimes look for alternatives to an open market sale, especially where a flat has a shorter lease and the freeholder may be able to refurbish it and grant a new long lease. A common question is whether Stamp Duty Land Tax (SDLT) arises if the leaseholder gives up the lease to the freeholder in return for a payment.

The short answer is that SDLT is generally concerned with acquisitions, not disposals. That means the leaseholder who surrenders the lease will not usually have an SDLT charge simply because they are giving up their interest. The party who may face SDLT is the freeholder, if the freeholder acquires the leasehold interest and gives chargeable consideration for that surrender.

The Question

A married couple jointly own a leasehold flat in England with around 60 years left on the lease. They are considering downsizing and want to avoid a conventional sale if possible. Their idea is to approach the freeholder and offer to surrender the lease in return for a negotiated payment at less than the flat’s likely full resale value, on the basis that the freeholder could then improve the property, grant a new long lease and sell it on.

They want to know what the SDLT position would be for:

• the joint leaseholders who surrender the lease;
• the freeholder who accepts the surrender and pays for it; and
• the eventual buyer of any newly granted long lease.

Nick’s Explanation

Nick’s core point was that SDLT applies to acquisitions of chargeable interests, not to disposals as such. In anonymised form, his explanation was:

“Surrendering your lease to the freeholder does not give rise to an SDLT liability for you, as SDLT is chargeable on the acquisition of a chargeable interest, not the disposal.”

He also explained that the freeholder is treated as acquiring a chargeable interest when the lease is surrendered back:

“The freeholder is treated as acquiring a chargeable interest in land upon accepting the lease surrender. If the freeholder pays consideration for the surrender, SDLT is chargeable on that amount.”

Nick further noted that if the freeholder later grants a new long lease to a buyer, that later transaction is a separate land transaction for SDLT purposes. SDLT may then be charged on any premium paid, and in some cases also on the net present value of the rent. If the buyer already owns another dwelling and is not replacing their main residence, the higher rates in Schedule 4ZA may apply.

The Law

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

• Section 42(1): “Tax shall be charged on land transactions”.
• Section 43(1): “A land transaction is the acquisition of a chargeable interest”.
• Section 43(3): this includes the acquisition of an interest by the surrender of an existing lease, and also includes the grant of a lease.
• Section 49(1): a person acquires a chargeable interest where that person becomes entitled to it.
• Section 50(1): chargeable consideration includes consideration in money or money’s worth given for the subject matter of the transaction.
• Section 55(1): SDLT is charged by reference to the applicable rate table.
• Schedule 5, Paragraph 3: where lease consideration consists of rent, tax may be charged by reference to the net present value.
• Schedule 4ZA, Paragraph 1: higher rates can apply to purchases of additional dwellings where the statutory conditions are met.
• Schedule 17A: contains the rules for calculating SDLT on lease transactions.

In practical terms, SDLT normally follows the acquisition side of the transaction. The person who acquires the land interest and gives consideration is the person whose SDLT position must be tested.

Analysis

There are really three separate stages to analyse.

First, the surrender by the current leaseholders.

The leaseholders are giving up their leasehold interest. That is a disposal by them, not an acquisition by them. Since SDLT is charged on land transactions defined as acquisitions of chargeable interests, the leaseholders do not usually incur SDLT merely because they surrender the lease. On the facts described, the surrender itself should not create an SDLT charge for the couple as the outgoing leaseholders.

Second, the freeholder’s acquisition on surrender.

When the lease is surrendered, the freeholder becomes entitled to the leasehold interest that is merging back into the freehold reversion. For SDLT purposes, that surrender is treated as a land transaction on the acquisition side. If the freeholder gives consideration for the surrender, such as a cash payment to the leaseholders, that payment is the starting point for the SDLT calculation.

So if the freeholder pays an agreed sum to take the flat back, the freeholder may have an SDLT liability based on that chargeable consideration, subject to the usual residential SDLT rules in force at the time.

Third, the later grant of a new long lease to a new buyer.

If the freeholder later grants a new long lease, that grant is a fresh land transaction. The buyer under that new lease may pay:

• a premium for the lease; and/or
• rent under the lease.

SDLT on lease grants can therefore involve two elements:

• tax on the premium; and
• tax on the net present value of the rent, if the rent is high enough for SDLT to be in point.

If that buyer already owns another residential property and is not replacing their only or main residence, the higher rates under Schedule 4ZA may also need to be considered.

This means the arrangement does not avoid SDLT altogether. Instead, the tax point moves to the party who acquires the interest at each stage:

• the freeholder on the surrender, if consideration is paid; and
• the later buyer on the grant of the new lease.

It is also worth noting that this is an SDLT analysis only. A lease surrender for payment may also raise other tax issues outside SDLT, such as Capital Gains Tax, and there may be valuation and drafting points that affect the wider tax treatment. Those issues need separate review.

Outcome

The practical SDLT result is usually as follows:

• The leaseholders who surrender the lease do not generally pay SDLT simply because they are giving up the lease.
• The freeholder may have to pay SDLT if the freeholder gives chargeable consideration for the surrender.
• If the freeholder later grants a new long lease, the new buyer may also face SDLT on the premium and possibly on the rent, depending on the lease terms.

So, in a typical surrender-and-regrant structure, the SDLT risk sits with the acquiring party at each stage, not with the outgoing leaseholder.

Practical Steps

• Identify exactly what the freeholder would give in return for the surrender, especially any cash payment or other value.
• Check whether the freeholder is acquiring a residential interest and what SDLT rates would apply at the proposed price.
• Review whether the later onward sale would be by way of a new long lease, and if so whether rent will be reserved as well as a premium.
• Model the SDLT cost for the freeholder on the surrender and for any future buyer on the new lease.
• Take separate advice on non-SDLT issues, particularly Capital Gains Tax and any leasehold or valuation consequences.
• Ensure the legal documents reflect the real commercial position, because SDLT analysis depends heavily on the actual consideration and the nature of the interest acquired.

Conclusion

If a leaseholder surrenders a flat lease back to the freeholder for an agreed payment, the leaseholder will not usually have an SDLT charge just for surrendering the lease. The likely SDLT charge falls instead on the freeholder as the acquiring party, based on the consideration given for the surrender. Any later grant of a new long lease is then a separate SDLT event for the next buyer.

Legal References Used

• Finance Act 2003, section 42(1)
• Finance Act 2003, section 43(1)
• Finance Act 2003, section 43(3)
• Finance Act 2003, section 49(1)
• Finance Act 2003, section 50(1)
• Finance Act 2003, section 55(1)
• Finance Act 2003, Schedule 5, Paragraph 3
• Finance Act 2003, Schedule 4ZA, Paragraph 1
• Finance Act 2003, Schedule 17A

This page was last updated on 22 March 2026.

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