Commercial lease: don’t forget to pay the stamp duty land tax

Have you just taken a lease on a shop or purchased a leasehold business with a new lease being granted to you? 

People often think that nothing is left to be done, but this is not always the case as there are still matters that need to be addressed after completion from a legal perspective. 

One of those is stamp duty payable on a lease being granted to you, and if you don't use a solicitor, the likelihood is you didn't know you had to pay this and register your lease at the land registry (if over seven years).

When taking a grant of a lease (when the requirements are met for that lease) it is a legal requirement that a stamp duty land tax (SDLT) return will need to be filed. 

Prior to completion, your solicitor or legal advisor would have calculated the amount of SDLT due and will pay this for you within 14 days of the effective date of the transaction. 

A common mistake that can occur in the event a solicitor or legal advisor not being instructed is that there is no SDLT on short term leases. This is not the case. Based on the net present value of the lease (being the term of years and level of rent calculated by HMRC) for non-residential properties, an SDLT return may need to be filed to HM Revenue & Customs (HMRC) and the tax paid within 14 days. Failure to do so will result in penalties.

The amount of SDLT you will be required to pay will depend on a number of factors. It is also important to consider if you are eligible for any SDLT relief. 

Your solicitor is best placed to do this, so you can cause yourself considerable issues in the future by not using one. 

An example is a restaurant owner who several years ago entered into a new lease of their restaurant and is now looking to sell. At a rent of £60,000 per annum, they were not aware (not using a solicitor) that they were required to pay SDLT. 

They are now selling their business, and the buyer has correctly (through their solicitor) asked for the lease to be registered and evidence of the SDLT being paid. 

The seller is now required to post completion of their lease, pay the SDLT and register the lease. They are now also required to pay a tax based penalty and interest on the initial £7,000 SDLT payment – all because they didn't use a solicitor at the time.

Non-residential property includes commercial property such as shops and offices, agricultural land and any property not used as a residence. A mixed-use property combines both residential and non-residential elements, the most common of which includes a shop with residential flats above.

The moral of this story is clear. Make sure you take proper advice, and you ensure you don't "save money" by not using a solicitor. A good commercial solicitor will add value and save you money, as the above case study clearly shows.

What happens with late payment

In the event of a late payment or late filing, buyers will pay an automatic fixed penalty. 

The amount of the penalty will depend on the lateness of the return. For a late filing of up to three months from the filing deadline, there is a fixed penalty of £100 rising to £200 for returns later than three months plus any interest that is payable from the filing deadline until the date the SDLT is paid. 

In extreme cases where a filing is late by more than 12 months, HMRC will charge a tax-based penalty, which can be up to the amount of SDLT due on the land transaction return, which is exactly what the restaurant owner discussed above is faced with. 

If a tax-based penalty is imposed, then HMRC will send you a formal penalty notice showing how this tax-based penalty is calculated, which is to be paid within 30 days. It is important to understand that this penalty can amount to the full amount of the tax due on the return.

Paying your SDLT late, in any event, will cause a detrimental effect from a financial point of view. Penalties incurred as a result of an unknown deadline, or a miscalculation is something that can be easily avoided if a solicitor is instructed who is aware of the existence of these rules in place.

Expert legal advice on your commercial property matters

SO Legal has offices across the South East. Our team of commercial property solicitors in London, Brighton, Eastbourne, Hastings and Uckfield can help you understand your options. 

If you need support with a commercial lease or want an informal no-obligation discussion, contact our team.