Stamp duty on commercial property is difficult to understand for people due to the varying rates at different times. Many people in the United Kingdom become confused when they have to pay stamp duty on their land and property. First, they have no idea which land type is taxable and at what time. Second, they find it hard to determine the right amount of stamp duty they owe to the HMRC.
In this blog, we will walk you through stamp duty and its different rates. Moreover, we will discuss, with the help of examples, commercial property and how it is taxed in the United Kingdom. So, let’s dive deep into this elaborative and informative discussion!
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What is Stamp Duty Land Tax (SDLT?
Stamp Duty Land Tax is levied on the purchase or lease of a property in the UK. The determining factor is either the purchase price or the lifetime value of a property. The residential, first buyer and second homebuyer, and the commercial properties are responsible for paying this tax in the UK.
Each type of property is not equally taxed. Instead, different types of properties have different Stamp duty rates in the UK. HMRC has defined different thresholds of prices with the aim to help the property owners calculate their SDLT charges conveniently.
Is There Land Tax on Commercial Property?
HMRC collects the Land Tax on commercial property. So, if you buy a non-residential property to rent it out or for leasing, you are liable to pay Stamp Duty Land Tax on your commercial property.
What is a Commercial Property?
Many people in the UK get confused about non-residential or commercial property. It is also known as the mixed property. The HMRC defines a commercial property as consisting of the following:
- Property that is not residential in nature
- Agricultural Land or farm
- A land apart from the grounds or the gardens of a dwelling.
- It will be considered a commercial property if you have bought six or more properties as a part of your single transaction, although they are for residential purposes.
Any of the above categories will make you eligible for the payment of SDLT to the HMRC.
SDLT Rates on Commercial Property
There are different rates on commercial property in the UK. However, the calculation is based on the different thresholds. For example, the nil rates start at £150,000. After this, if the purchase price exceeds this threshold, the commercial property owner will be taxed. The rates are as follows:
- 0% for a commercial property worth £150,000
- 2% for a commercial property worth between £150,000 to £250,000
- 5% for a commercial property worth more than £250,000
If the price of a property is more than £250,000, the first £150,000 will be charged SDLT of 0%. The next £10,000 from £150,000 to £250,000 will be charged at a rate of 2%. And, the remaining amount above £250,000 will be charged at a rate of 5%.
Example of SDLT Rates on Commercial Property
Suppose, you have purchased a commercial property for £350,000. The SDLT calculation will be as:
- The first £150,000 are SDLT free. It is equal to zero.
- The amount between £150,000 to £250,000 will be charged at a rate of 2%. In other words, £100,000 is taxed at 2%. It equals the £2,000
- The amount above £250,000 that is £100,000 will be taxed at a rate of 5%. It becomes equal to £5,000.
- Now, add all these tax rates. £0 + £2 000 + £ 5 000 = £7 000.
So, the commercial property owner who has purchased at a price of £350 000 will pay a stamp duty of £7 000.
Is There SDLT on Leases and How is it Calculated?
If you buy a commercial property on lease, you will pay tax on two accounts. One is the SDLT on the purchase price of the property. The second is the Net Present Value (NPV) of the property. Net Present Value is the amount you will receive in future by renting out the property. The rates for a leased property are different from a freehold property.
The Net present value is calculated as:
NPV = ∑ [r/(1 +T)]
Where r = rent of the property in a given year.
T = Temporal Discount Rate of 3.5%
The SDLT rates for a leased property are:
- 0% for the commercial or leased property of an NPV from £0 to £150,000
- 1% for the commercial or leased property of an NPV from £150,001 to £500 000 000
- 1% for the commercial or leased property of an NPV above £500 000 000
- If you buy a non-residential property whose assigned period is less than seven years and you have to pay an amount less than the threshold.
- Moreover, if you get a property in a will or after the divorce.
- If you buy a non-residential property at a price lower than £40 000. Besides, if the annual rent is less than £1 000 if you buy a new or an assigned lease of more than seven years.
- Property Investment funds
- Sharia Law Compliance Financial Arrangements
- Sales of the companies and the relocation of the employees.
When must the SDLT be Paid?
HMRC requires the property owners to pay the SDLT after 14 days of the completion of the purchase of a commercial property. In other cases, if you have paid 90% of the payment or the first rent of the property. However, if you have purchased a property in Wales or Scotland.
The Bottom Line
The bottom line is property owners have to pay Stamp Duty Land Tax on their commercial properties. For this, they need to understand the SDLT rates for the purchase price and the leased property as they differ from each other. Besides, the exemptions must also be taken into consideration.
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Disclaimer: All the information provided in this article on Stamp duty on Commercial Property, including all the text and graphics, is general in nature. It does not disregard any professional advice.