The taxation of leases
VAT on commercial leases
Whether you will be required to pay VAT on rents, service charge etc will depend on whether the landlord has exercised an “option to tax” in respect of the building.
You will get this information from the Landlord’s replies to pre-contract enquiries.
If an “option to tax” has been exercised the lease will make it clear that you will be liable for the VAT element.
If your business is VAT registered this will purely be a cash flow issue.
If you are not VAT registered it will represent a real additional cost.
In such circumstances, you may want the Landlord to covenant that it will not exercise and “option to tax” throughout the term of the lease.
Stamp Duty Land Tax (SDLT)
SDLT replaced stamp duty from 1 December 2003.
It is currently charged at 1% on any premium of over £150,000 but less than £250,000. Higher rates apply beyond that level.
SDLT is also payable on SDLT is charged on the net present value (NPV) of the rent (including any VAT) over the term of the lease.
A discount of 3.5% is applied to the rents payable in each year of the lease (including the rent payable in the first year). This reflects the fact that rents to be received in the future have a lower value than rents received today.
SDLT is charged at 1% on all rents with an NPV in excess of £150,000.
It is important that you submit an SDLT return on completion of the lease. Without this, your lease may not be registered at HM Land Registry.
Your solicitor will advise you of the amount of SDLT that is due.