Renters could pay significant penalties due to a little-known law, says agency

Private tenants could find themselves paying significant penalties due to a little-known law that may require them to pay Stamp Duty Land Tax (SDLT) despite not actually owning their rental property, according to Benham and Reeves.

While renters may believe stamp duty is only a concern for those purchasing a home, the London-based agency says that, since 2003, residential tenancies have had the potential to be liable for SDLT, but only when the cumulative rent exceeds £125,000.

In other words, when a tenant has, under a continuous or successively linked lease, paid more than £125,000 in rent, they are required to start contributing to SDLT.

To be precise, according to Benham and Reeves, they are required to pay 1% of the rent value as an annual tax.

This tax must be paid separately from the rent payments via a declaration form SDLT1 to the Inland Revenue within 30 days of the date the tenancy commenced or the date the lease was executed, whichever is earlier.

While £125,000 sounds like a huge number and a threshold most people are unlikely to break in the same rented home, it is not as unlikely as it may seem, especially in the London rental market.

Across London, the average monthly rent value is £1,597 totalling an annual payment of £19,164. To reach the £125,000 threshold would, therefore, take 6.5 years. And once the threshold is broken, the 1% annual SDLT bill would total £192 per year.

In some parts of London, however, this threshold is likely to be exceeded in much less time than the 6.5-year average. In Kensington & Chelsea, where the average annual bill is £32,544 per year, the SDLT rental threshold would be exceeded in just 3.8 years, after which point the tenant will be required to pay an estimated annual SDLT bill of £325.

In Westminster, the average annual cost of renting is £30,336 which means the threshold would be reached in 4.1 years and the subsequent tax bill would be £303 per year; while in Hammersmith & Fulham, the average annual rent of £23,568 meaning the threshold would be met in 5.3 years and the tax bill would be £236 per year.

With more people renting for longer portions of their lives, SDLT payments could become a more pressing concern for tenants as the cumulative years in a tenancy agreement start to pile up. As such, all tenants need to make sure they know one very important thing: when their tenancy agreement comes to be renewed, is the renewed contract linked to the previous one rather than it being considered an entirely new agreement? If so, the SDLT threshold could soon be reached and they could be liable to pay tax.

Director of Benham and Reeves, Marc von Grundherr, commented: “Tenants might feel they already get a rough ride – high rent payments, lack of security in their home, none of the freedoms that come with ownership, and so on – so the idea of now having to pay an ownership property tax is very unwelcome indeed.

“But unfortunately there is little they can do to change the situation should they reach this threshold, so it’s vital that tenants who believe they may reach or exceed it are aware of exactly what they owe and when.

“A good letting agent will be able to advise on this matter, but the truth is that this law is so unfamiliar to most that even your agent may not be fully aware of how it impacts you as a tenant.

“In any case, this additional outgoing may seem like the cherry on top of an already expensive cake, but failing to address it could be far more costly.”

Average rent value data sourced from the Office for National Statistics (ONS).

SDLT for tenants information sourced from Benham & Reeves

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4 Comments

  1. A W

    Little known? It should be in every AST and should state something along the lines of “the Tenant shall be responsible for assessing his liability”.
    It is up to the tenant to declare it to HMRC thankfully so agents/agencies aren’t liable should a tenant not do so.

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  2. Ian Narbeth

    The article is not quite right. SDLT returns must be made and the tax paid within 14 days of “the effective date of the transaction”. It is the net present value of the rental stream (discounted at 3.5%) rather than the gross rent that is measured. Guidance can be found here: gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm14060

    In practice most tenants will be blissfully unaware of the law and HMRC are unlikely to find out. Once a tenant becomes aware that he is at or near the threshold because the periodic tenancy has continued sufficiently, the easy solution is to agree a new tenancy with the landlord so that the £125,000 limit starts again.

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    1. Woodentop

      ? seeing as agents are required to declare to HMRC rents paid to landlords it wouldn’t take a keen HMRC officer to work it out if they should look further.

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      1. Ian Narbeth

        The SDLT rules have been in place for many years (though the reduction from 30 to 14 days for reporting is more recent) so I suspect many tenants have inadvertently failed to declare.

        HMRC would need to check the lease and whether it was periodic. I don’t think a statement of rents paid, per se, would be enough. If HMRC start pursuing tenants then, as I said earlier, the solution is a new tenancy. In many cases landlords/agents insist on new tenancies when the old tenancy expires so the issue does not arise.

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