Stamp Duty Land Tax at the start of the lease


Note: the Finance Bill 2019 contains provisions to reduce the SDLT filing and payment window from 30 days to 14 days for land transactions with an effective date on or after 1 March 2019.

Stamp Duty Land Tax (SDLT) is a tax on land transactions. It is potentially payable whenever a new lease is entered into: this includes an unwritten lease such as a periodic tenancy, and also a lease that doesn’t start until a specified future date (known as a reversionary lease). SDLT may also be payable prior to lease grant when an agreement for lease is in place and this agreement is “substantially performed” (explained below). SDLT is not usually payable on the grant of a licence to occupy or a tenancy at will, though some care does need to be taken as HMRC’s interpretation of these terms are not always the same as a property lawyer’s interpretation.

This note aims to provide an overview of the rules relating to SDLT when a new commercial lease is first entered into. It does not cover residential leases, does not detail the reliefs that may be available and only looks at the law as is stands today. The rules relating to SDLT on renewal leases are covered in a separate briefing note. Be aware that the rules change frequently, are very complex and can sometimes be applied in unexpected ways, particularly where connected companies are involved. You should always seek advice specific to your particular situation.

What is SDLT payable on?

SDLT is payable on the “chargeable consideration” given by the tenant for the grant of a lease. The chargeable consideration is made up of any premium paid by the tenant, the “net present value” (NPV) of the rent due over the term and any other consideration that the tenant gives. It includes sums paid to the landlord indirectly (for example, by a third party to pay off a sum owed to the tenant), sums paid by a connected person (for example a parent company), and non-monetary consideration. Chargeable consideration also includes all VAT payable on these sums, except where this is payable only by virtue of an option to tax after the date of the transaction.

Where multiple leases are “linked”, SDLT is calculated by reference to the combined chargeable consideration, with the amount of SDLT apportioned between them (to avoid tenants taking, for example, two separate leases of a building, each at a rent level that falls just below the SDLT threshold). Leases are “linked” when they are between the same landlord and tenant (or persons connected with them) and form a part of the same transaction: essentially this means that if the deal would not have been done – or would not have been done on those terms – if the other lease was not also being granted, they will be linked.


The premium includes any sum payable by the tenant for the grant of the lease. It excludes the payment of the landlord’s reasonable costs and expenses but includes payment of the landlord’s estate agent’s fees.

Rent deposits are potentially taxable as a premium. However, there will rarely be any SDLT payable on them because (a) an exception is made for rent deposits not exceeding twice the maximum annual rent payable during the first five years of the term; and (b) if the deposit is below £150,000, and no other premium is payable, they will not be subject to SDLT.


SDLT is only payable on the principle rent, not on other sums due, even where these are reserved as rent (eg service charge and insurance premiums). However, where an inclusive rent is payable, SDLT will be due on the whole sum unless the lease contains an express apportionment. The separate section below explains in more detail what rent SDLT is payable on.

Other consideration

A tenant’s covenants will rarely count as chargeable consideration. Covenants to repair, maintain or insure (or pay the landlord’s costs in this regard) will never be chargeable consideration and nor will any other covenant that does not affect the amount of rent payable. Likewise, guarantee covenants, penal rents and agreements to indemnify the landlord for third party liability will not amount to chargeable consideration. Where a covenant restricts the tenant’s use of the property this may amount to chargeable consideration, in which case it’s necessary to look at an open market comparator to see how much the tenant would have paid without this restriction. However, in practice this is very difficult to assess, as there may be no market without the restriction.

A tenant’s construction obligations in the contract may also amount to chargeable consideration (the open market value of the works). However, the works will be exempt if the following three conditions are met: (a) the works are carried out after the effective date; (b) the works are carried out on the land being let, or other land held by the tenant or a connected person; and (c) it is not a condition of the transaction that the works are carried out by the landlord.

What rent is SDLT payable on?

The term

SDLT is payable on all rent due throughout the term, calculated from the later of the specified term commencement date and the date of grant. This is the case even if the lease specifies an earlier term commencement date (eg the previous quarter day). It is unusual for rent to be payable for a period prior to lease grant, but any which is will be taxed as if it were a premium. No account is taken of any break date or any right to renew so, from an SDLT perspective, a shorter lease with a renewal right is preferable to a longer lease with a break right.

The Net Present Value

The calculation of NPV is intended to give an estimate of the current value of the total rent that will be paid. Where the rent is known for the first five years (whether or not there is, or may be, any variation after this), the rent for the whole term is based on the rent for those five years, assuming that the rent for each remaining year will be equal to the highest rent during those five years.

There is an online SDLT calculator which can be used to work out the NPV of a lease, though it is essential that the rent figures and dates are input accurately as the lease calculator can only manage simple calculations: this can cause issues even in relatively straightforward transactions with a rent free period or where the rent changes during the first five years and the term commencement date is backdated. It is essential that you accurately calculate the amount of rent actually payable for each year of the term calculated from the date of grant.

Uncertain rents

Even if the rent for the first five years is not known when the lease is granted (for example, where there is a turnover rent or a rent review during the first five years), the NPV must still be calculated for the whole term, by making a reasonable estimate of the rent for each of the first five years. Once the rent for the first five years is known, the SDLT due must be recalculated. A recalculation is also required at the end of the first five years, based on a revised estimate, even if the actual rent is not yet known. For a lease with a turnover rent this usually means that three calculations (and potentially three returns) will be needed: one at lease grant, one at the end of five years and one when the fifth year figure has been calculated. Note that these rules do not apply where rent increases in line with RPI, even where the adjustment is capped or subject to a minimum/maximum increase restriction and cannot be decreased. However, the rules do apply where the increase is determined by reference to an RPI formula (eg RPI + 3%).

There is a carve out of any rent increase due to a rent review that falls five years after a date falling within three months before the lease start date. This is useful where the term commencement date is backdated to the previous quarter day, with a five year review by reference to that commencement day.

Indefinite terms

Where a lease is for an indefinite term (for example, the grant of a periodic lease) it is treated as a lease for a deemed fixed term of one year. At the end of the first year the lease “grows” by a further year, and so on for as long as the lease continues, with the SDLT position being revisited each time.

Variations after the first five years

Any variations which take place after the first five years of the term (whether pre-planned, following a rent review or as a result of a lease variation) can be ignored for SDLT purposes. For increases before 17 July 2013, there was an anti-avoidance rule which would bring those increases into consideration in the event that they could be regarded as abnormal (approximately 20% or more per annum) but this rule has now been abolished and is not dealt with in this note.

Agreements for lease

SDLT may be payable before lease grant if an agreement for lease is “substantially performed”. Substantial performance occurs on the date that the tenant does any of the following:

  • Pays any rent: This is likely to include an amount expressed to be a licence fee but that is referable to the rent payable under the lease once granted.
  • Pays a substantial proportion of any non-rental consideration due: This is usually interpreted as 90% or more, although this isn’t actually stated in the legislation.
  • Obtains access to the property and takes possession of it: Any occupation of the property may trigger this, though it is a question of degree. Access only at specified times, onto a limited part of the land, or for a limited purpose (eg to carry out contamination checks) probably won’t trigger it. Occupation by a connected person or an agent will be sufficient, as will occupation by a third party on the tenant’s behalf (for example, a builder carrying out the tenant’s fit-out works).

As soon as an agreement for lease is substantially performed, a notional lease is deemed to have been granted. This notional lease and the actual lease are treated as a single lease, starting on the date of substantial performance and ending when the actual lease ends. If the end date and rent for the first five years are known, the procedure is the same as for any other lease grant, and no further return or payment will be needed at actual lease grant. If the end date of the actual lease is not yet know, the notional lease must be treated as a lease for an indefinite term, though HMRC is also willing for an estimate of the lease end date to be made, with a further payment/return as required when the lease is granted. Similarly, if the rent for the first five years is unknown when substantial performance takes place, the notional lease will be treated as having an uncertain rent, with a further payment/return as required when the lease is granted.

How much SDLT is payable?

Where only rent is due, SDLT is payable on the calculated NPV of the lease. No SDLT is payable on the first £150,000 of the NPV (so if the NPV is less than £150,000, no SDLT is payable). The excess is charged at 1% of the value exceeding £150,000, up to £5 million; and at 2% of the value that exceeds £5 million.

Where only a premium is due, no SDLT is payable where the premium is £150,000 or below. Where the premium is more than £150,000, SDLT is payable at the following rates (the appropriate rate is charged on the whole of the premium):

  • more than £150,000 but not more than £250,000: 1%
  • more than £250,000 but not more than £500,000: 3%
  • more than £500,000: 4%

These rules operate independently so both sets of rules should be applied when there is both premium and rent. There was an exception to this which applied prior to 17 March 2016 but which has now been removed: where the average rent was more than £1,000 per annum, there was no zero rate threshold for the premium and SDLT was payable on the whole of the premium at 1% up to £250,000 (and at the usual rates for higher premiums).

When do I need to make an SDLT return?

An SDLT return is always required if any SDLT is payable; however, a return will sometimes be required even if no SDLT is due:

  • If the term of the lease is less than seven years and SDLT would have been payable but for a relief.
  • If the term of the lease is seven years or more and the chargeable consideration other than rent is £40,000 or more; or the average annual rent is £1,000 or more; or SDLT would have been payable but for a relief.

Whenever a return is required it must be made (and any SDLT due paid) within 30 days of the effective date of the transaction. The effective date is usually the date on which the lease is actually granted (including for reversionary leases). However, where substantial performance occurs under an agreement for lease, the effective date is the date of substantial performance. In situations where the rent is uncertain and a further return is required when it becomes certain, the effective date is the date on which it became certain. Where a return is required at the end of five years, the effective date is the last day of the fifth year of the term.

Late returns and investigations

There is a flat-rate penalty of £100 for any late-submitted return; this increases to £200 after three months. If the submission is more than 12 months late, there is an additional tax-related penalty, up to the full amount of tax due. Interest on unpaid SDLT starts to run 30 days after the effective date until it is paid, currently at 3.25%. HMRC have wide powers of investigation and can open an enquiry into a return (or lack of return), with the power to correct the assessment or make their own assessment and recover the underpaid tax plus interest. Where a full disclosure of the circumstances has been made to HMRC they have a nine month enquiry window; this increases to four years where no disclosure is made. If the failure is due to “carelessness” the period increases to six years, and where it is deliberate they have 20 years.

If you have any questions about SDLT at the start of a lease, please speak to one of the solicitors in our real estate team. We are happy to help with completing the return on your behalf and calculating the amount of SDLT due. While we are unable to give detailed advice on more complex transactions we are happy to work with your own tax advisers or recommend an expert who will be able to assist.


The information set out in this briefing note is provided free of charge for information purposes only to clients and prospective clients of this firm. We make every reasonable effort to check that the information is accurate and up to date but we cannot accept any responsibility for its accuracy or correctness or for any consequences of relying on it. Please note that the information does not and is not intended to amount to legal advice and you are advised to obtain specific personal advice from us or another lawyer about any case or matter and not to rely on the information or comments in this briefing note.

© BSDR 2018

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