What Is Stamp Duty on a Tenancy Agreement?
A tenancy agreement stamp duty is actually a tax that is levied on any legal document that has something to do with the sale, transfer, or lease of legal interest in property. It’s not strictly limited to tenancy agreements, but for the purpose of this post, will be our focus.
BusinessTenancy.co.uk indicates that "the legal term ‘stamp duty’ can mean a seal, any official mark or written authority." In the specific case of tenancy agreements, it’s the seal or official mark that makes the tenancy agreement legally binding on both landlord and tenant. It also means that landlords (and sometimes tenants) will have to pay a tax on any tenancy agreement that extends to a year or more.
But what does that mean for landlords? If you’re looking to rent out a residential unit for one year or longer , you will need to pay the Stamp Duty on Tenancy Agreement. The amount payable will be determined by the annual rent as well as the period of time for which the tenancy agreement will be in effect.
On the other side of the coin, landlords who are renting out a business premises will be required to pay Stamp Duty on Tenancy Agreement for all new tenancy agreements. And if the business premises changes ownership, the new owner will be required to pay the tax on the new tenancy agreement.
How Is Tenancy Agreement Stamp Duty Calculated?
Calculating stamp duty for tenancy agreements is relatively straightforward. It requires a simple formula that takes into account the rental value, that is, the rent per annum as agreed in the contract, and the duration of the lease which is typically specified in years.
The formula is:
Rental value multiplied by the term multiplied by 0.25%
For example if the rent is £12,000 per year and the duration is 5 years, the stamp duty would be £12,000 x 5 x 0.0025 = £150. An alternative example with a shorter lease on higher annual rent would be a property rented at £60,000 per year for at term of 1 year. This would mean the stamp duty payable would be £60,000 x 1 x 0.0025 = £150.
Different formulas do apply to different types of tenancy agreement which will be discussed later in this guide.
Stamp Duty Variations Across Jurisdictions
Stamp duty requirements vary from jurisdiction to jurisdiction. As a result, the party who is responsible for the payment of stamp duty (i.e. either the tenant or the landlord) must ensure that they are aware of the relevant requirements. Some jurisdictions are more stringent than others and it is crucial for the parties to know their legal obligations.
In England and Wales, any document relating to a lease for a term of more than seven years, which is executed on or after 1st April 2008, must be stamped within 30 days of execution at the Land Registry. A fine of £500 may be imposed for any failure to do so which is the equivalent of late stamping where the stamp duty was payable at the 7th year level. The stamp duty is calculated in the same way as it would be if it were a land transaction with each 7 year block being treated as a separate transaction. There is no tax payable at the 21st year.
The stamp duty rate in England and Wales is the same as for a land transaction. The rate depends on the annual rent payable and the amount of any premium payable. A lease for a term of less than seven years is exempt from stamp duty where the rent does not exceed £1250 per annum.
In Scotland, stamp duty is payable on leases for a term of more than five years by the tenant. The rate of stamp duty depends on the net present value of the rent payable during the term of the lease. There is an issue fee of £25.
In Northern Ireland, stamp duty only becomes payable if the premium payable plus the net present value of the rent payable is over £500. The rates are the same as for a land transaction.
In Australia, stamp duty on leases is payable on leases for a term of more than 5 years if the rent is over $400 per annum. However, in some states no duty is payable on leases for a period of 12 months or less. The figure will need to be adjusted to take account of concessions and exemptions that may apply in each state depending on the type of property involved. It is the responsibility of the tenant to ensure that stamp duty is paid and to ensure that the document is stamped before it is executed. If this does not happen the renting party may be liable to pay a penalty of up to four times the amount of stamp duty.
In Hong Kong there is a stamp duty charge if the rent payable equals HK$240,000 or more per annum. There is a $20 stamp duty flat charge for leases for a term of less than one year. For leases of one year or more, the stamp duty is calculated on the rent payable over 3 years. For leases of three years or more, the stamp duty is calculated on the rent payable over 6 years.
Changes to the tax regime in New Zealand came into effect on 1st October 2010 and the stamp duty system was abolished completely. In addition, a concession which allowed certain types of commercial leasing arrangements to be exempt from approval by the Overseas Investment Office was also removed from the legislation.
Who Pays for Stamp Duty?
The liability for paying stamp duty on an agreement may be specifically set out in the agreement itself. It is common for the parties to supplement any statutory requirements with their own agreement on who shall pay the stamp duty on a tenancy agreement, if applicable. In practice, landlords usually pay. This will maintain their negotiating power and preserve the possibility of rent increases at review in the future.
Under section 36 of the Finance Act 1989 the tenant under a lease has the primary liability to stamp a tenancy agreement. Section 77 of the Finance Act 2003 sets the statutory responsibility for payment of SDLT on a transaction on the purchaser although the transfer of property to a partnership falls back on each partner. Occupying tenants are not "transferring property" to a landlord when entering into a tenancy agreement. Therefore liability remains with the tenant under section 36 of the 1989 act.
The circumstances in which a landlord may be liable for the stamp duty are in two areas either the tenancy is within a portfolio of other office space owned by the landlord or the landlord takes on responsibility for payment by express agreement with the tenant (see below).
There are two circumstances in which the landlord is responsible for stamping a tenancy agreement – a general portfolio rule and the case of Saffron Estates v Simmons & Simmons:
Debt Due from Tenant
It is common for the lease to require tenant to pay the cost of stamping the lease document. The law is clear that it is the tenant that must pay. If the agreement provides that the tenant will pay the stamp duty it is a debt due from the tenant at the time of execution. A landlord cannot sue for the debt for unpaid stamp duty without paying the stamp duty himself – HMRC would then give a receipt to the landlord showing the amount paid. The landlord has the right to recover the amount as a debt. If the tenant fails to pay , reading this clause as a clause entitling the landlord to recover the stamp duty as a debt fails as the amount is not presently payable. Therefore although the covenant to pay the stamp duty is enforceable the clause cannot be enforced until the stamp duty is demanded, invoiced or otherwise formally requested from the tenant for payment. If the tenant fails to pay the landlord may recover the debt through the usual methods of bringing a claim in the civil courts.
Rent Reviews Where the Tenant Pays the Cost of Stamping
Where the provisions consider the position at rent review where the tenant is required to pay the costs of stamping the new lease, then the cost of stamping the lease as agreed is treated as rent due from the tenant on the next rent quarter day if left unpaid. For example, if the rent is paid quarterly in advance on the quarter days of 25 March, 24 June, 29 September and 25 December, the rent review provisions require the tenant to pay the cost of stamping the new lease, it provides HMRC issue a certificate payment of stamp duty as at the quarter day falling six months after the date the new lease is to take effect. In this case, the liability to stamp the new lease arises on the next rent quarter day after that quarter day.
The landlord can recover the stamp duty costs as follows:
Tenant Pays – NET Lease
If the agreement is net, the stamp duty is regarded as a deduction from the rent. Therefore where stamp is payable by the tenant at the end of the term the stamp duty cannot be added to the rent. The question is how that is possible, given that the tenant is stamping a document with its own CDS form. HMRC says that notwithstanding the fact that the standard consent form does not provide for the landlord stamping a lease for the tenant, if the tenant refuses to obtain the consent of the landlord before stamping the lease document, the landlord cannot be obliged to bear the cost of the stamp.
Failure to Pay Stamp Duty Penalties
Section 4 of SADA states that failure to pay the stamp duty on a tenancy agreement has the effect that the tenancy agreement shall be deemed to be for an indefinite period, and shall be renewed from month to month for successive months at the end of each month, subject also to all other terms and conditions contained in the agreement. The tenancy agreement can only come to an end if either party gives three months’ notice before the end of the month in question. The payment of rent every month would now be of the same kind and for the same amount as the rent provided for in the original agreement. Failure to pay the stamp duty may result in the landlord’s eviction proceedings being struck out in circumstances which the tenant did not necessarily wish to occur. The landlord/lessor might be precluded from evicting the tenant until the correct duty is charged and paid. This will mean substantial inconvenience and large frustration for all parties involved.
Helpful Tips for Meeting Stamp Duty Obligations
To comply with the requirements of the SDLT provisions as contained in the FA 2003, within 30 days of the date of a tenancy, the landlord must send a return to HMRC using SDLT(SD)1, together with payment of the appropriate SDLT liability.
It is essential that the SDLT return is completed fully and correctly with the information in the appropriate boxes and does not refer the reader elsewhere e.g. to a schedule. All of the information requested in the SDLT(SD)1 must be provided.
A common error that arises is when the tenancy agreement is for a period of less than 7 years and the full rent over the term of the tenancy amounts to £1250 per annum or less. SDLT is chargeable but at a nil rate, i.e. a charge to tax that incurs no tax. A nil return must still be completed when there is no SDLT payable, setting out the details as requested on the return. This is as opposed to an exemption from SDLT which, if the exemption applies, no SDLT return need be sent to HMRC at all .
If a tenancy is deemed by HMRC’s guidance to be a ‘high value residential property lease’, then a return needs to be submitted regardless of the value of the rent or the term of the tenancy.
HMRC are empowered to charge a £100 penalty to a landlord for failure to make a return and pay the SDLT due within the 30 day time limit. Any SDLT paid to HMRC then attracts further (penal) interest and the SDLT plus the interest must be paid. In addition, if payment were to be made late, an interest will be charged under FA 2003 Schedule 10 Pt 3, however the tax geared penalty should provide sufficient disincentive against making a late payment. Doubling of any charge, so that instead of paying only £100 penalty and interest as above, the landlord would have to pay £200 plus interest (plus default interest), should ensure that the landlord takes SDLT deadlines seriously.
For more information about the SDLT payable on a tenancy agreement visit the Revenue’s SDLT Guidance website at www.hmrc.gov.uk/sdlt.