HMRC shock for tenants - some may have to pay stamp duty

A little-known law may require tenants to pay stamp duty on the rental properties they do not actually own.

London lettings agency Benham and Reeves says that it is widely believed that stamp duty land tax is paid only by owners of properties.

But in reality since 2003 residential tenancies have had the potential to be liable for SDLT - although only those tenants where the cumulative rent adds up to £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. 

They are required to pay one per cent of the rent value as an annual tax. 

Benham and Reeves says 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’s become possible in high value markets like London’s.

Across the capital, 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 - a period for which many tenants have been in situ, particularly in light of the pandemic which dramatically slowed churn in the rental sector.

Once the £125,000 threshold is broken, the average one per cent 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.

The agency says that 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. 

The director of Benham and Reeves, Marc von Grundherr, comments “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. 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.”