SDLT – Commercial property charging structure reformed at the cost of higher tax charges for more expensive properties

Wed 16 Mar 2016

In a logical move the charging structure for non-residential property has now been brought into line with that for residential property by abolishing the slab system which applied a single rate to the entire transaction value.

This brings the method in which stamp duty land tax (‘SDLT’) is applied to property transactions in England and Wales more into line with the approach applied to property in Scotland under land and buildings transaction tax (‘LBTT’) which has used a marginal system since its introduction last year with each rate payable only the portion of purchase price falling within each rate band.

The new rates and thresholds are as follows:

A big disadvantage of the slab system is the distortion caused by large increases in SDLT payable as transactions move into the higher bands and it was never clear why the slab system was retained for non-residential or mixed property when it was abolished for residential property in December 2014.

The revisions remove this distortion and, for purchases of lower value properties, have the welcome benefit of reducing the SDLT payable.  However, once the purchase consideration exceeds £1,050,000 the changes increase the amount of SDLT payable.

When a lease is granted, SDLT has always been payable on any premium as well as the net present value of the rents over the term of the lease.  Changes are now being made to the rates that will apply.

For SDLT on the rent, a marginal system was already in place with a nil rate band of £150,000 and SDLT payable at 1% on that part of the net present value of the rent that exceeds £150,000.  A new rate of 2% will now be introduced which will apply to that part of the net present value of the rent that exceeds £5 million.

For a 10 year lease, the net present value of the rent will exceed £5 million where the annual rent (including VAT if chargeable) exceeds just over £600,000 per annum.  For a 20 year term, the £5 million threshold will be exceeded where the annual rent (including VAT if chargeable) exceeds just over £350,000 per annum.

SDLT is applied to the premium (and any other consideration that is not rent) in the same way as for a purchase so to the extent that any premium exceeds £250,000 a rate of 5% will apply.  Previously, where a premium was payable and annual rent of at least £1,000 was paid the nil rate band was dis-applied when calculating the SDLT on the premium so that even where the premium was no more than £150,000 SDLT at 1% was payable.  This provision will now be repealed so that regardless of the rent payable, the first £150,000 of any premium will not be taxed.

So, for both purchases and leases, the changes are advantageous for smaller value transactions but penalize higher value transactions.

The above changes will apply to all transactions which complete on or after 17 March 2016 but where contracts were exchanged before 17 March the taxpayer will have the option to use the old structure and rates.

The Government expects around 90% of non-residential property transactions to pay the same or less SDLT as a result of the changes and expects to raise around £2.6 billion over the next 5 years.

Author: James Summers