When you purchase a property you often have to pay Stamp Duty Land Tax, also known as SDLT.
However, the good news is that most people don’t need to pay stamp duty (SDLT) on their statutory lease extension premium - i.e. the sum of money paid to buy the extra years.
Even if SDLT is payable on your lease-extension premium, it is not normally payable on the fees you pay to your own solicitor or valuer. The freeholder’s reasonable legal and valuation costs that you are required to pay under section 60 of the Leasehold Reform, Housing and Urban Development Act 1993 are also excluded from the SDLT calculation as confirmed in SDLTM11060.
This article explains this in more detail and relates to statutory lease extensions on flats under the Leasehold Reform, Housing and Urban Development Act where the ground rent will always be a peppercorn (£0) after the grant of the new lease. Please note it is just a summary of Government guidance and legislation. It should not be taken as tax advice.
Do you only own one residential property?
If you’re extending the lease on the only property you own (in the world) then you would only need to pay Stamp Duty Land Tax (SDLT) if the premium is over £125,000. If you are either married to someone who owns another qualifying property, or a co-owner of your flat does, please read the next section.
The £125,001 threshold is set because a lease extension is considered the same as purchasing a property and Stamp Duty Land Tax is only payable on purchases over £125,000.
In this case you will only pay Stamp Duty on the bit above £125,000.
So, if the lease extension premium is £175,000, you’ll pay Stamp Duty on £50,000. You can get an idea of the rate you would pay here.
As a result, unless you have very high value flat (in somewhere like Belgravia) and / or you have a very, very short lease then you are unlikely to have to pay SDLT on your lease extension.
Do you own more than one residential property (or are married to or own the property with someone who owns another qualifying property)?
However, the story is little different if you own multiple properties.
Even if you only own one property this rule still applies if:
- If you are married to / civil partners with someone who another qualifying property or
- If you own the flat in question with a friend who owns another qualifying dwelling
In this case, you’re likely to have to pay the Stamp Duty if the cost of the lease extension is £40,000 or more - unless the property you're extending the lease on is your main residence.
Is the flat your main residence (and you own another property?): If you are extending the lease on your main residence, the 5% higher rate surcharge does not apply, even if you own other properties (such as a Buy-to-Let flat) - so long as the exceptions below are met.
While a lease extension does not qualify as a main residence replacement (since you are not selling or "disposing of" your property), a specific statutory exemption exists under Paragraph 7A of Schedule 4ZA to the Finance Act 2003.
Under this exception, you must already own an interest in the flat, and it must have been your only or main residence throughout the previous three years. If you own it as a tenant in common, your share must be at least 25%. Special rules apply to joint ownership. The protection will not apply if the existing lease has less than 21 years left to run.
This is an exception that does not always appear to be cited, so if you are intending to use it you should get formal tax advice first.
The £40,000 threshold is due to the Higher Rate of Stamp Duty, which kicks in at £40,000.
Confusingly, the way this works is that if your lease extension premium is £40,000 or above and the higher rate applies you will pay Stamp Duty on the whole amount. This means if your lease extension premium is £50,000, you’ll pay Stamp Duty on £50,000 – not £10,000.
Submitting your SDLT
Even if you don't need to pay any Stamp Duty, if your lease extension premium is £40,000 or above then you / your representatives must submit a SDLT return.
If you do need to pay Stamp Duty you must do so within 14 days of the date of the transaction.
Please be reminded that this is not Tax Advice. Specific circumstances can vary if and you should speak with a Tax Advisor if you have queries related to your situation.
