Little-known law could see tenants paying hefty property tax penalties on stamp duties despite not actually owning their rental property, research by London estate and rental agent Benham and Reeves.
The SDLT has been at the center of mainstream media since the government introduced a reprieve in 2020 to encourage housing market activity during the global pandemic. While tenants may believe that SDLT is only for those who buy a house, the truth is that since 2003 residential rentals can potentially be responsible for SDLT, but only when the cumulative rent exceeds £ 125,000.
In other words, when a tenant has, under a continuous or successively bound lease, paid more than £ 125,000 in rent, he is required to start contributing to the SDLT. To be precise, they are required to pay 1% of the value of the rent as an annual tax. This tax must be paid separately from rent payments via an SDLT1 declaration form to the Inland Revenue within 30 days of the rental start date or the lease signing date, whichever occurs first.
Although £ 125,000 seems like a huge number and a threshold that most people are unlikely to break in the same rented house, it is not as unlikely as it sounds, especially in the London rental market. .
Across London, the average monthly rent is £ 1,597, for an annual payment of £ 19,164. Reaching the £ 125,000 threshold would therefore take 6.5 years. And once the threshold is crossed, the annual bill for 1% SDLT would rise to £ 192 per year.
In parts of London, however, that threshold is likely to be exceeded in much less time than the 6.5-year average. At 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 the tenant would have to pay an estimated annual SDLT bill of £ 325.
In Westminster, the average annual rental cost is £ 30,336, meaning the threshold would be reached in 4.1 years and the subsequent tax bill would be £ 303 per year; while at Hammersmith & Fulham the average annual rent would be £ 23,568, meaning the threshold would be reached in 5.3 years and the tax bill would be £ 236 per year.
With more and more people renting for longer periods of their lives, SDLT payments could become a more pressing concern for tenants as the cumulative years in a rental contract begin to add up. So, every tenant should make sure to know one very important thing: when renewing their rental contract, is the renewed contract linked to the previous one rather than being considered as a brand new contract? If so, the SDLT threshold could soon be reached and they could be subject to tax.
For tenants, the thought of paying a new tax is probably frustrating. Rent is already very expensive, so the extra costs can be maddening, and the extra time and effort it takes to stay on top of SDLT payments is definitely a pain. However, it is important that all responsible tenants pay their SDLT tax on time, otherwise the relatively low cost of the tax will be replaced by a much larger tax evasion fine from HMRC.
Marc von Grundherr, Director of Benham and Reeves, commented: “Renters may feel like they’re already being taken a bit of beating – high rents, lack of security in their home, none of the freedoms that come with owning property, and so on. – the idea of now having to pay a property tax is therefore very undesirable Indeed.
“But sadly, there’s not much they can do to change the situation if they hit that threshold, so it’s critical that tenants who think they can meet or exceed it know exactly what they owe and when.
“A good rental agent will be able to advise you on this, but the truth is that this law is so unfamiliar to most that even your agent may not be fully aware of its impact on you as a tenant.
“Either way, this extra release might seem like the icing on the already expensive cake, but not responding could cost a lot more.”