A little-known Stamp Duty Land Tax (SDLT) on leases clause, introduced on 1 December 2003, may require tenants to pay 1% tax on any rental payments above £125,000.

Tenants could face penalties for non-compliance, including £100 for filing a return up to three months after the filing date, £200 for filing a return more than three months after the filing date, or the full amount of tax due if you fail to file your return within 12 months.

HMRC confirms this is a separate stamp duty payment to that paid by landlords when initially purchasing a property to rent out.

Further, given the current stamp duty payment holiday through to March 2021, this SDLT lease clause still remains as the tax is lifted for buyers, not renters on properties worth up to £500,000 in England.

‘Shocked I may be liable for the stamp duty tax’

Senior account manager, Andrew Morris, said he was shocked to discover this clause deeply buried in his tenancy agreement:

The 29-year-old and his partner live in north London and pay £1,775 per month in rent. He says: “I was shocked to discover that as a tenant I might be liable to pay stamp duty tax at some point in my tenancy, as even though the threshold is £125,000 of rental payments, it would only take five to six years of renting the same property to reach that figure.

“The actual amount due may also be relatively small, but the principle of this not being explained to us by the letting agent or landlord at any point seems rather deceptive, particularly with the clause being hidden quite deep within the tenancy agreement.”

How does it work?

For the basis of this article, we cover residential properties being rented in England only.

SDLT may be due on the grant of a lease (tenancy agreement) and is calculated by reference to the ‘Net Present Value’, ie the total rent paid.

HMRC confirms that where the total rent paid exceeds £125,000, 1% SDLT should be applied and paid for by the tenant.

The HMRC Leasehold sales on Stamp Duty Land Tax guidance makes reference to both a five-and seven-year time frame for SDLT due.

However, HMRC confirmed to YourMoney.com that if a lease is treated as a ‘successive linked lease’, then there’s no time limit, so SDLT will be due whenever the threshold is passed.

By ‘successive linked lease’, it means where a tenancy agreement is renewed between the same parties, eg the same tenant and landlord, and with the same terms eg fixed rent. There are exemptions to these successive linked leases, however.

So as an example, renters in long-term tenancy agreements and those who pay higher monthly rents are targeted under this HMRC SDLT clause.

However, Angela Davey, ARLA Propertymark President says: “Whether this clause is included in a tenancy agreement depends on which market the agent is working in, as high value rents only tend to be applicable in certain cities across the UK.”

In Morris’ case, the couple pay £21,300 a year in rent. If they remain in the same property on the same terms, they would be required to pay the SDLT in year six of the tenancy agreement.

The tax would amount to £28 (£127,800 rent minus the threshold £125,000 equals £2,800. 1% on £2,800 = £28).

The 1% tax typically needs to be paid within 30 days of the start of the tenancy or the date the lease was executed, whichever is earlier. This is done through an SDLT1 form.

When it comes to house shares, the liability is shared. This is because the £125,000 threshold applies per property and Dawn Sandoval, director of Dawn Sandoval Residential Ltd, says: “All tenants if named on the agreement are considered joint and severally liable”.

Trevor D’Sa, partner at Haysmacintyre adds: “SDLT applies to the transaction document, in this case the lease, so if there was one lease with a number of different tenants you would need to look at the total value of the rent due under that lease and any SDLT would be shared by the tenants.”

Do you need to pay the SDLT?

Stark figures from the Office for National Statistics (ONS) reveal that renting is on the up while homeownership is falling.

A quarter of people aged 16-64 rent privately, up from one in 10 in 1993, and people aged 35-44 were almost three and a half times more likely to be renting in 2017 than in 1993.

It also found that for almost any age, it is less common to own with a mortgage than 10 or 20 years ago. As such, it says a possible scenario for the future is that the current 6% of people aged 65 and over who rent privately today is likely to increase for those currently aged 30-50.

This, coupled with high loan-to-value (low deposit) mortgages all but disappearing in the wake of the coronavirus crisis and savings whittled away due to pandemic redundancies, may mean more people are forced to rent for longer as they’re unable to get onto the property ladder.

As such, it seems more people will fall under the radar of the lease tenancy SDLT.

However, property and tax experts report that while they’re aware of this SDLT payment, they’ve never dealt with any cases.

Sandoval says: “In 20 years I have yet to hear of anyone actually paying this, and the bottom line is who will come chasing and how can this be monitored? It’s completely impossible.”

D’Sa says: “We very rarely come across this as tenants rarely stay in properties at sufficiently high rents for long enough to make this a factor. But there should be a greater awareness, as we understand that the penalties can be quite onerous, even for small amounts of SDLT due.”

Paul Ives of The Letting Centre, says: “It is a branch of the Inland Revenue that is little publicised. There are few high rents of this level, so we rarely come across it, and for those few tenants who pay these high rents, we suspect that it is rarely paid or declared, and there is no active enforcement. A case of a poorly thought-through law that most people ignore.”

Even HMRC was unable to provide YourMoney.com with figures relating to how many renters had paid this SDLT charge.

Russell Quirk, property expert at MovingHomeAdvice.com says he hasn’t yet come across anyone who has paid the tax.

“That’s probably because the onus is on the tenant to know that the levy is due and to voluntarily pay the duty over to HMRC. Unsurprisingly, this rarely happens in practice,” he says.

Despite this, Dan Wilson Craw, deputy director of Generation Rent, says: “In practice, few tenants will be paying a high enough rent for long enough in one place to incur stamp duty, but that doesn’t make it okay for them to face this liability. First time buyers have already got an exemption from paying stamp duty so it is perverse to impose the same tax on renters who have been unable to save to buy a home.”

Quirk adds: “Stamp duty is a draconian tax in any case, a burden originally placed on the public in 1694 to fight a war on France, which now reaps over £9bn each year from aspirational homeowners whose ‘crime’ as a trigger for the levy, is merely to aspire to own a property. Adding further penalties for second home owners, landlords, foreign buyers and yes, tenants that pay over £125,000 in cumulative rent, is simply highway robbery in my view.”

However, this tenant wants to make sure their tax affairs are all above board.