Tenants liable to pay Stamp Duty?

by Readers Question

10:57 AM, 8th December 2020
About a month ago

Tenants liable to pay Stamp Duty?

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Tenants liable to pay Stamp Duty?

Stamp Duty Land Tax (SDLT) is normally directly associated with purchasing a property or land rather than with our renting tenants, but it may come as a surprise to know that certain long term renters have had to pay 1% SDLT.

Since December 2003 residential tenancies have the potential to be liable for SDLT and with more and more people finding it harder and harder to get their first step on the property ladder, and the average tenancy length being 4.5 years, it is highly likely that more and more tenants will find themselves liable to pay this surprising tax.

SDLT is levied on the rent paid and calculated on the amount of gross rent for the term of the tenancy. This computation produces an amount known as the Net Present Value (NPV).

NPV is calculated by taking into account the highest 12 monthly rents in the first 5 years of the tenancy. It is done via a complicated formula which maybe the HMRC is only capable of understanding.  If anyone is interested to test it, their online calculator is available: Click here

SDLT is calculated across the total time a Tenant takes a tenancy for, up to a maximum of seven years. If a tenant takes a one-year tenancy (AST) and then renews for a further year, this will be considered by the Inland Revenue as a linked transaction and the NPV calculation will be based on the gross rent paid for both years, up until 7 years of a linked tenancy for the tenant.

This cycle can be broken if a new AST is signed BUT it MUST have different terms, if a copy AST is signed this does not break the linked transaction of the tenancy, it may be difficult to sign a new AST which does in fact break the linked transaction cycle.

It is worth noting that when calculating the term of the tenancy, it is likely to include both fixed-term tenancy and periodic tenancy (where the tenancy continues after a fixed term).

This SDLT is paid by the Tenant.

From 17 March 2006 if the Rent paid by a tenant (NPV) is less than £125,000, no Stamp Duty Land Tax is payable.  If the rent paid (NPV) is more than £125,000, Stamp Duty Land Tax is due

When SDLT is due the Tenant must complete and submit a declaration form SDLT1 to the Inland Revenue within 30 Days of the date the tenancy commences or the date the tenancy was executed, whichever is the earlier.

If the tenant fails to pay in what HMRC describe as a ‘timely fashion’, which actually means within three months of the filing date, the renter could incur a £100 fine.

Where no payment is made after three months passes that penalty will rise to £200, and could continue to rise to the full amount of the tax due if the return is 12 months overdue.

Covid and the stamp duty holiday.

Although the Stamp Duty holiday is currently being taken advantage by many, it does not apply to these renting arrangements. The reason for this is that the scope of the SDLT holiday relates to tax being lifted for buyers rather than renters, which will offer no comfort to those who do not own their homes.

Jules Ford HLPA
Hemel & St Albans Property Network

HSPN Ticket (Single)


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Comments

The Forever Tenant

11:25 AM, 8th December 2020
About a month ago

This is pretty interesting. Something that may actually be an issue for me in the future.

Could I get a clarification however.

In the details above, it mentions that the SDLT is calculated to a maximum of 7 years. Does this mean that no matter how long I stay in one place, only 7 years worth of rent will be used to determine if I would be responsible for SDLT, or would they take the amount paid over the entire length of the tenancy, but only ask for SDLT covering 7 years worth of rent?

TrevL

16:54 PM, 8th December 2020
About a month ago

Bit of a non story really....the amount of tenants renting the same place for 7 years must be small.

This will however, just encourage them to find somewhere else.....with the landlord probably losing a decent tenant.

Ian Narbeth

10:52 AM, 9th December 2020
About a month ago

The calculation is not "a complicated formula which maybe the HMRC is only capable of understanding". It is a simple Net Present Value calculation and can be done in Excel. The discount rate is 3.5%.
Put the following into Excel with the 3.50% in Cell B1 and the first yearly rental figure (£36,00 in my example) in Cell B3. The formula is =NPV(B1,B3:B7)
Rate 3.50%
Year 1 £36,000
Year 2 £36,000
Year 3 £36,000
Year 4 £36,000
Year 5 £36,000
NPV = £162,542

reader

11:35 AM, 9th December 2020
About a month ago

Dear All,
I guess this is calculated on the term within the document. So a normal 6 month or 12 month residential AST followed by many years of a periodic tenancy would not attract the tax.

Why on residential tenancies would you wish to grant a longer and taxable period?

Ian Narbeth

11:49 AM, 9th December 2020
About a month ago

According to HMRC's website: https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm17035
"A series of leases will often exist between the same parties, for example where a short lease is renewed between the same tenant and landlord. A renewal lease will be treated as linked with the original lease if, for example, the rent was fixed under the terms of the original lease or is stated to be the same as that payable under the original lease.
However, the renewal of a lease will not be treated as linked with the original lease at all for SDLT purposes if it can be shown (with appropriate evidence) to have been negotiated at arm’s length, for example if the original or earlier lease:
expired naturally
contained no right or compulsion of either party to renew and/ or
was renewed following entirely new negotiations, as would apply to a new tenant."
It is unlikely that residential leases would be granted for sufficiently long to worry about SDLT and also it is unlikely the parties would NOT be free to negotiate new terms on the expiry of the first lease,

silversurfer2017

13:04 PM, 9th December 2020
About a month ago

This does seem a bit of a non story. How do HMRC find out and is it worth their time and effort to try and find out? Is it the tenants duty to notify or enquire with HMRC on a regular basis that as they have been renting the same place for many years could they possibly be liable for this 1% SDLT charge? I would be surprised if this often happens. The penalty for non compliance is £100. I think most tenants will continue in blissful ignorance and in a worst case scenario pay a £100 fine. Remember this is a fine on tenants so it is much cheaper than the fines on landlords which can run into thousands!

terry sullivan

15:13 PM, 9th December 2020
About a month ago

mostly applies to commercial leases? and usual exemption of £125000?

David

17:28 PM, 9th December 2020
About a month ago

I dont think its a non-story, I think its just something that has come more to the fore as rents have increased. £125k over 7 years is just over £1488 a month, which is a two bed flat in outer London, and as has been said, this would include replacement tenancies and periodic tenancies that follow on.

silversurfer2017

17:45 PM, 9th December 2020
About a month ago

Reply to the comment left by David at 09/12/2020 - 17:28
Hi David - but as I said, how is HMRC going to find out and is the tenant going to be bothered anyway?

Seething Landlord

20:27 PM, 9th December 2020
About a month ago

The usual form of AST currently in use is for a fixed period with provision for it to continue as a contractual periodic tenancy indefinitely if the tenant remains in occupation after the initial term. This seems to fall within the definition of an "indefinite term lease" - see https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm14045 and this may also apply to agreements which become statutory periodic tenancies (I think it does but can't be sure!).
"All leases for an indefinite term are treated initially for the purposes of SDLT as being for a fixed term of one year" - see https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm14050 - and if they continue beyond one year their treatment is specified at https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm14070 which says that at each anniversary it is regarded as extended for a further notional period of one year.
As far as I can make out, notification is required once the NPV from the date of the original grant to the end of the current new period crosses the threshold that applied originally so older tenancies continuing from before March 2005, when the zero band was £60,000 could easily now have crossed the line and become chargeable. I take it that SDLT would be payable on the whole of the NPV as for many years it was payable on the whole consideration, not just the bit that exceeded the threshold.
The final paragraph of sdltm14070 is "Note that a lease for an indefinite term will not come within the notification requirements merely because its notional term has been extended to seven years or more, as notification is only required when the lease, when granted, is for a term of seven years or more and the grant is for chargeable consideration. Refer toFA03/S77(2)(a)."

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