Commercial Leases & SDLT - How Long Is Too Long?

With Bank of England interest base rate currently at 5.75%, purchasing commercial property with the aid of a mortgage can be expensive.

In addition to the rates at which businesses borrowings must be repaid, purchasing property incurs fees and expenses. Leaving aside the costs of searches against the property and the fees of professional advisers, acquisition of property usually attracts Stamp Duty Land Tax. (SDLT). Current rates for the acquisition of non-residential property are as follows:

Rate of Tax                  Purchase Price (inclusive of any VAT)
Zero                              £1 - £150,000
1%                                £150,001 - £250,000
3%                                £250,001- £500,000
4%                                Over £500,000


As a consequence, many businesses choose to take a lease of a property which they wish to occupy.

SDLT, however, is also applicable to the taking of a commercial lease, although the calculation is based on the annual rent payable (annual rent usually means rent plus VAT).

By way of example, a fifteen year lease of an industrial unit at a rent of £45,000 plus VAT per annum, attracts an SDLT charge of £3,682.

So what can be done, legitimately to mitigate the rate of SDLT on such a lease?

One way forward is to reduce the term of years granted but this may not be acceptable to a proposed tenant, as he may require the premises concerned for a minimum period of time.

The lease can, therefore, be granted for a five year period, with an option for the tenant to renew for a further five years, both at the end of the initial term and at the end of the tenth year.

Such an arrangement reduces the initial term of the lease, and the consequent charge to SDLT, but guarantees the tenant security of tenure for fifteen years (provided he acts in accordance with the lease covenants and remembers to exercise the renewal options).

The initial five year lease attracts a £531 SDLT charge. Over fifteen years (and after two renewals), the total charge to tax will be £1,593, a worthwhile saving on the fifteen year lease charge, even when renewal costs are taken into account.
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