What is Stamp Duty and Why Does it Matter?
What is Stamp Duty and Its Significance to Tenancy Agreements
Put simply, stamp duty is a tax charged on various transactions in the UK, including leases, sales, mortgages and other land transactions. The government then levies that charge to help it fund public services. But what is its real value?
Historically, stamp duty applied to a range of transactions, including contracts of sale, shares issues, and mortgages. But that all changed in 2003, when the Labour Government overhauled the property tax regime in favour of the much-simplified Stamp Duty Land Tax (SDLT). You might have heard of the Tax simply referred to as stamp duty.
In essence, the charge is intended to authorise the application of SDLT to transactions before they are completed. For many landlords, the process isn’t necessary, as most Tenancy Agreements fall below the £125,000 minimum charge . In practice, the cost of a Lease is often included in the overall Premium for a commercial property, so the SDLT is not paid separately.
Rates of SDLT are currently set at between 0% and 12%. It used to be the case that the Standard Rate was a flat rate, but now the charge depends on the total value of the transaction (this also applies in Scotland and Northern Ireland).
The actual calculation is complicated by the applicable rate. Below is the rates for tenancies:
It’s important to note that stamp duty is not the same as an administration fee, but often, estate agents plough the two. Ultimately, the Tax is charged on the chargeable consideration, which may include the rental premium, rent, and any costs of alterations to the property. SDLT is not charged on service charges or management charges.
How Tenancy Agreements are Charged Stamp Duty
So, when is stamp duty payable on tenancy agreements?
The test for whether stamp is payable on a tenancy agreement is fairly straightforward – on the facts of a particular transaction – but finding these precise facts and applying them correctly is less so.
The general rule is that if a tenancy agreement is for a period of seven years or longer, the agreement is chargeable to stamp duty (subject to a de minimis rent test).
The de minimis rent test means that only agreements under which, during the whole of the term of the tenancy, the rent exceeds the equivalent of £1,000 per year are chargeable to stamp duty. When calculating rent, we must ignore any consideration for services in the agreement, only considering the consideration for the letting of occupation.
So, in practice, this means that if a tenancy agreement is for, say, five years and a rent of £450 per year, there is no stamp duty charge payable (as the rent does not exceed £1,000 per year).
However, if the same matter were for a period of 10 years at the same rent, then stamp duty would be payable. Because although the effective rent is £450 per year (below the de minimis threshold of £1,000 per year), the rent over the full 10-year term would be £4,500. This amount exceeds £5,000 (the full seven-year term, also exceeding £1,000 per year).
But it gets more complicated. A tenancy agreement for six years at £200,000 per year would, for the purposes of the de minimis test, be classified as annual rent of £376,069.74 (£200,000 ÷ 5.31). In this case, whilst the agreement is not chargeable to stamp duty because it is not for seven years, the rent for purposes of the seven year test is taken to be £376,069.74 per year (which exceeds £1,000). So, in this case, stamp duty would be payable on the agreement.
Some exceptions to this rule include tenancy agreements between group undertakings or a government department and a tenant group undertaking, or if the term of the tenancy is not certain or for a term exceeding 35 years.
Calculating Stamp Duty: A Practical Approach
Whether you are buying a new home or making changes to your tenancy, no one wants to be paying too much in stamp duty. Here’s how you can work out exactly how much you’re obligated for, without the guesswork. For many readers of this blog, the first thing to do is make sure what you are dealing with is even a tenancy agreement. Taxation.co.uk has a useful guide on the differences between tenancy and leasehold agreements to help you figure it out. First up, you’ll need to establish how long your tenancy agreement is for. For agreements for fixed terms of less than five years that have sections 8 or 13 of the Land Act 1954 written out, you will be paying a single duty fee of £1. The higher cost comes into play for fixed term agreements of five years or more, where the stamp duty applies for every additional year over those five years. A starting point of £5 applies and £5 per year thereafter, so you would be paying an agreement of 7 years at £30. You’ll also need to take into account elements such as rent including certain types of utilities payments or late penalties. Failure to do so will result in a surcharge of £100. With that taken into consideration, this is an example of how you would factor a net annual rent of £15,000, including heating and late payment penalties, into an online stamp duty tenancy agreement calculator: To therefore work out your stamp duty under the rules in force from 1st December 2003, you will have faced a flat fee of £110 (on top of the initial £1 for an agreement of up to 5 years) plus 1% of the market value. For illustrative purposes, you would then have paid a total of £510 if the market value was £10,500. The best way of working out how much stamp duty you’re required to pay is with an online calculator. Just plug in your tenancy details and it’ll work out the fee in minutes. Online calculators will take into account tenancy period and add in the yearly fee for any that go over five years in a fixed term agreement, as well as penalising you if you forget to include utilities in the overall rent, among other aspects. The results will give you a good idea of how much stamp duty you need to pay to avoid any nasty fines from the HMRC. Overview of common pitfalls Common mistakes when calculating stamp duty include forgetting certain elements of rent, especially those pertaining to utilities and types of leasehold agreement, or neglecting to factor any changes into your assessment. Given the frequent changes to the regulations, readers won’t be the first to assume that any previous calculations they’ve made are still valid under the current guidelines. It can also be easy to be caught out by the subtle but crucial differences between a tenancy and a leasehold agreement, so read up on those before you begin a tenancy.
Using Online Stamp Duty Calculators
Employing Online Stamp Duty Calculators
With the development of technology, interpreting stamp duty calculations with accuracy is now more efficient. Many resources and tools are now available on the internet to calculate stamp duty payable. As such, online calculators for stamp duty are particularly useful for the interpretation of stamp duty on commercial lease or tenancy.
How do I use the online stamp duty calculator? Most online calculators only require some basic information, such as: The calculator will then generate a summary of the calculations and give the total of stamp duty payable, minus any rebates or remission. Some calculators will give the break down of the figures, showing the different amounts of required for each calculation.
What calculators are available online? There are many online calculators, however in New South Wales there are three most popular stamp duty calculators. They are: Duties Calculator – NSW Office of State Revenue, Land Tax Calculator – NSW Valuer General, My Business Fitouts Rental Calculator.
It is important for the end user to understand what each of the online calculators provide. In general the Duties Calculator and Land Tax calculator are provided by the relevant state authority and are updated accordingly by them. The My Business Fitouts Rental Calculator is a non – government calculator, however it is very user friendly and a quick way to work out your stamp duty cost. It uses eStamping rates.
Current Rates, and the Exceptions to Stamp Duty
The current rates of stamp duty for most tenancy agreements in England and Northern Ireland are calculated at the annual rent rate. The duty is payable at the following rates:
The exemption limit for commercial and residential leases, which came into effect on 6 April 2013, is currently £125,000 and for all other property transaction documents is currently £5,000.
Like any tax system, however, there are a number of exemptions and exceptions which can be available to the tenant. A number of these are set out below .
Commercial Leases
Commercial leases with an annual rent or consideration of less than £1,000 will not attract any stamp duty due to the concession limited to commercial leases. However, from 6 May 2014 any lease with an annual rent or consideration above £1,000 will be liable.
Residential and Other Leases
Any tenancy or licence to occupy, which is not a commercial lease, with annual net rent not exceeding £250.00 is exempt from stamp duty.
Assured Shorthold Tenancies
There are certain exemptions from stamp duty for ASSURED SHORTHOLD TENANCIES.
These are:
Assured Tenancies
Assured Tenancies are exempt from stamp duty on deposits made for the lease.
Implications of Avoiding Stamp Duty Payment
Failure to pay the required Stamp duty can result in up to a £5000 fine in the magistrates’ court and/or six months imprisonment. The contract is termed as an "undocumented Instrument" which is subject to maximum penalties equivalent to the stamp duty that would have been payable if the document had been stamped. Although the courts generally avoid imposing these maximum penalties, this penalty (including some fines by HMRC when they catch you) plus the normal stamp duty would add up to pretty heavy cost, so it is best to pay the duty if the amount isn’t too large. If the stamp duty has not been paid on a tenancy agreement, this could potentially affect the landlord or tenant if the rental agreement comes into question. Unfortunately it is not uncommon for landlords to have not paid stamp duty in an attempt to save costs. This may result in the courts presuming that your statutory six month tenancy agreement has taken effect, and that you should not be serving a section 21 notice until the six month expiry date has been reached.
How to Meet the Legal Requirements for Stamp Duty
Ensuring Compliance with Stamp Duty Requirements
To avoid any potential legal issues for either tenant or landlord, it is important that both parties take the following practical steps:
-step 1 – When entering into a tenancy agreement, the parties must determine whether it will fall under the minimum threshold. If the rent is less than £1,000 per annum, then neither party will be required to pay stamp duty from 1 April 2016.
-step 2 – If the rent exceeds £1,000 per annum, the parties will need to consider whether (i) the tenancy agreement is in writing and (ii) the rent is payable over a period of 30 years or more.
-step 3 – If the tenancy agreement is not in writing or the term is shorter than 30 years, there will be no requirement to pay stamp duty.
-step 4 – If it has been established that the tenancy agreement is written and for 30 years or more, the parties will need to work out how much rent will be paid in the first 5 years of the tenancy. If this amount is less than £5,000, no duty will be payable from 1 April 2016.
-step 5 – If the annual rent within the first 5 years of the tenancy agreement is at least £5,000, the parties will need to establish how much rent will be paid per year after the first 5 years . Again, if this amount is £1,000 or less, there will be no requirement to pay stamp duty.
-step 6 – If the annual rent after the first 5 years is £1,001 or higher, the parties will need to establish how much rent will be paid each year after the first 10 years. If the annual rent will be £1,000 or less, no stamp duty will be payable.
-step 7 – As above, if the annual rent after the first 10 years is more than £1,000 but £1,111.11 or less, there will be no need to pay stamp duty for the next 5 years.
Following the above process should help landlords and tenants determine whether stamp duty will be payable and, if so, how much. The tables below provide a quick guide to calculating the amount of duty payable on a tenancy agreement:
If you have already entered into a tenancy agreement with a term of 30 years or more, an annual rent of £1,000 or more, and paid less than £5,000 in stamp duty, the tenancy will be treated as having always been chargeable and you will need to assess what past tax years are involved and pay tax for each year with interest and late payment penalties.