17 July 2023

Residential SDLT - I am a private rental tenant, do I have to pay stamp duty land tax?

Most people are aware of the need to pay stamp duty land tax (SDLT) when buying a house for a high enough purchase price.

With its myriad of rules (additional property surcharge, non-resident surcharge, flat rates for companies), SDLT has become increasingly complicated, however one group who rarely have to consider the Byzantine depths of the Finance Act 2003 are private renters. But is this something they should be thinking about?

What is SDLT?

SDLT is a transfer tax on the acquisition of property interests in England and Northern Ireland. Wales and Scotland have similar but slightly different regimes (Land Transfer Tax and Land and Building Transfer Tax respectively). SDLT is due whenever a relevant land interest is transferred, be that by sale or by grant of a lease, and chargeable consideration above the nil rate threshold is paid for this transfer. SDLT is taxed in a progressive banded system, much like income tax, such that the value of the chargeable consideration that falls into each band is taxed at the relevant rate for that band, for example the first £250,000 of a purchase price (assuming neither the additional property surcharge or non-resident surcharge applies) will always be taxed at 0%, regardless of whether the total purchase price is £300,000 or £2 million.

There is no difference for SDLT purposes between a “tenant” and a “leaseholder”. SDLT applies to any freehold or leasehold transfer (it does not apply to licences) subject to certain transactions that are exempt from the tax (primarily for being low in value). SDLT as a tax looks at the substance of a transaction, not the way it is described. One cannot define oneself out of an SDLT charge, for example by labelling a lease as a licence.

Chargeable consideration is the price paid for the transfer. For a purchase this is simply the price you pay. For rent it is the net present value (NPV) of all the rent across the term of the lease. This uses a discount value (3.5%) so future rent is not valued as highly as rent due immediately. For leases longer than five years it is only rent in the first five years that is used for the SDLT calculation, with the highest year’s rent in that five-year period being taken as the rent for every year above five; thus rental increases after the first five years are ignored. As such, the NPV will be less than just simply adding up all the rent over the term of the lease.

Does this apply to private rental tenants?

The short answer is “it can do”. The slightly longer answer is “it’s very unlikely that the average tenant will need to pay SDLT or file an SDLT return”.

For a lease of under seven years an SDLT return only needs to be filed if the chargeable consideration is above the nil rate threshold. This is currently set at £250,000, raised from £125,000 in 2022 by Liz Truss, although due to be cut back to £125,000 in March 2025.

It is highly unlikely that most residential rental leaseholders will be taking leases with a rental NPV above £250,000.

What if I renew my lease?

Some tenants may fear that by renewing their lease several times they may reach a stage where SDLT is due. This will, however, only be the case if the renewals are “linked” for SDLT purposes.
Linking is a grey area for SDLT, primarily designed to stop transactions being split to minimise tax, e.g rather than buying a house for £500,000, you buy the house for £250,000 and the garden for £250,000, and pay no tax as you have two transactions each under the nil rate threshold.

Renewing a lease is not traditional transaction splitting, however if it is done with an option to renew within the lease itself then this will be linked, i.e. if the lease includes a provision allowing the tenant to renew the lease at the end of the current term, and the tenant does so, the renewal will be deemed to be linked.

On the other hand, if, around the time of expiry of the term of the lease, the tenant and landlord agree they both want the tenancy to continue for a further term, with no requirement that both or either must agree to this, (probably with some degree of negotiation over any rental increase), then it is likely that the leases will not be linked.

Even if leases are linked, at the current nil rate threshold, a lease with a rental value of £2,000 a month will need to be renewed for an occupation of 14 years before SDLT is due on the rent. On that basis, even London renters are unlikely to be triggering SDLT obligations.

If a lease is renewed such that it lasts for over seven years, and each renewal is linked, then an SDLT return is likely to be required even if no SDLT is due.

What if I am non-resident?

For SDLT purposes you are generally non-resident at the time of a transaction if you have not spent 183 days in the UK in the 364 days before the transaction.

Unlike the “additional property” 3% surcharge, which only applies to the premium, the 2% non-resident surcharge can apply to rent in some circumstances, namely:

  1. If there is also a premium value worth more than £40,000. This will trigger the non-resident surcharge, making the nil rate threshold for rent a 2% band, such that any level of rent will result in tax
  2. Where the lease is for more than seven years and the annual rent is more than £1,000

If you are UK non-resident, then you may pay SDLT on your rent if you take a lease for seven years or your lease renews to be, in total, over seven years in length (and the renewal(s) are linked as above) or you pay a premium over £40,000 alongside your rent.

What if I am doing something unusual?

The risk of an average private rental tenant having to file an SDLT return or pay SDLT is low. The tax is most likely to be paid by someone doing something unexpected such as:

  1. Paying a very high level of rent – the exact level will depend on the length of the lease but for a one-year lease, rent of over £21,000 a month would be needed to go over the current nil rate threshold
  2. Renting where there was always an agreement that the leases would renew, especially to take the total term to over seven years
  3. Renting from family on a non-arm’s length basis – this would make it more likely that renewal leases are linked (however the most obvious non-arm’s length basis is for under market rent which would mean the nil rate threshold would be less likely to be triggered!)

For the average renter, who has taken a lease from a third party landlord, even London rental rates will not trigger SDLT liabilities for a short term AST (assured shorthold tenancy) unless the lease contains an option to renew and this is triggered several times.

Summary

SDLT can apply to private rental tenancies, but typically only applies where rent values are very high or if something unusual is taking place. For the vast majority of renters, SDLT is not a tax that they will need to consider.

That said, renters should be careful if:

  1. Their lease is granted for a term of seven years or more
  2. Their lease contains an option to renew, and they take up this option (and the renewed lease has a further option to renew, etc.) such that the total length they occupy the property exceeds seven years (in which case an SDLT return will be due in the seventh year although depending on levels of rent there may still be no tax)
  3. Their lease does not contain an option to renew but it was always intended that the lease would last more than seven years (in which case an SDLT return will be due in the seventh year although depending on levels of rent there may still be no tax)
  4. They are non-resident for SDLT purposes and either pay a premium worth £40,000 or occupy for over seven years (with any renewals treated as linked)
  5. Their lease has a very high level of rent

Disclaimer

This note reflects the law as at 11 July 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

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