When buying a leasehold property in the UK, it’s essential to understand how Stamp Duty Land Tax (SDLT) applies to your purchase. While stamp duty applies to both freehold and leasehold properties, the rules surrounding leasehold transactions can be a little more complex. In this guide, we’ll explain how SDLT is calculated for leasehold properties, the differences between leasehold and freehold purchases, and what you need to know about additional payments such as lease premiums.
What is a Leasehold Property?
A leasehold property is one where you purchase the right to live in a property for a set number of years, rather than owning the property outright. The property is still owned by a freeholder (or landlord), and as a leaseholder, you typically pay ground rent and service charges for the upkeep of the building and common areas. Leasehold properties are commonly found in flats, but houses can also be sold as leasehold in some cases.
When purchasing a leasehold property, you’ll often buy a long lease, which can range from 99 to 999 years, and in some cases, the lease can be extended.
How Stamp Duty is Calculated for Leasehold Properties
Stamp Duty Land Tax (SDLT) for leasehold properties is calculated based on two potential components:
- The purchase price of the lease (similar to freehold properties).
- The Net Present Value (NPV) of rent or ground rent payments, if applicable.
SDLT on the Purchase Price
The calculation of SDLT on the purchase price of a leasehold property works in the same way as it does for freehold properties. The following SDLT rates for residential property apply in 2024:
- Up to £250,000 – 0%
- £250,001 to £925,000 – 5%
- £925,001 to £1.5 million – 10%
- Above £1.5 million – 12%
These rates are applied in bands, meaning SDLT is paid on the portion of the price that falls within each band. For example, if you’re buying a leasehold property for £600,000, you would pay 0% on the first £250,000 and 5% on the remaining £350,000, resulting in an SDLT bill of £17,500.
SDLT on Rent (Net Present Value)
When buying a leasehold property, especially a long-term lease, SDLT may also be payable on the Net Present Value (NPV) of the rent you’ll pay over the lifetime of the lease. The NPV is essentially the total value of all rent payments, adjusted for inflation and other factors.
Here are the SDLT rates for the NPV of leasehold rents in 2024:
- Up to £150,000 (NPV) – 0%
- Above £150,000 (NPV) – 1% on the portion over £150,000
This part of the SDLT calculation typically applies when the ground rent is substantial or when you are taking on a lease that involves significant rent payments over time. For example, if the NPV of the ground rent is £200,000, you would pay 1% on the portion above £150,000, which is £50,000. This results in an additional SDLT payment of £500.
SDLT on Lease Premiums
In some cases, when acquiring a leasehold property, you might also be required to pay a lease premium—a one-time, lump-sum payment to secure the lease. This payment is treated similarly to a property purchase price, meaning SDLT is calculated based on the total lease premium.
For instance, if you’re purchasing a leasehold property with a lease premium of £300,000, the standard SDLT rates for residential properties would apply. You would pay 0% on the first £250,000 and 5% on the remaining £50,000, resulting in an SDLT bill of £2,500.
Additional Considerations for Leasehold Properties
Leasehold Extensions and SDLT
If you decide to extend the lease on your property, SDLT may be payable on the amount you pay for the lease extension. The tax is calculated based on the premium paid for the extension, using the same SDLT rates that apply to residential purchases.
For example, if you pay £100,000 to extend the lease, you won’t need to pay SDLT, as it falls under the £250,000 threshold. However, if you pay £300,000, you’ll pay SDLT at 5% on the portion above £250,000, resulting in a bill of £2,500.
First-Time Buyer Relief on Leasehold Properties
If you’re a first-time buyer, you may qualify for First-Time Buyer Relief, which applies to properties valued up to £625,000. The relief means you won’t pay SDLT on the first £425,000 of the purchase price, with a 5% rate applied to the remaining amount up to £625,000.
For example, if you’re buying a leasehold property for £500,000 as a first-time buyer, you’ll only pay SDLT on £75,000 (the portion above £425,000), resulting in a bill of £3,750.
Surcharges for Additional Properties
If you’re purchasing a leasehold property as a second home or investment property, the 3% SDLT surcharge on additional properties applies. This surcharge is added to the standard SDLT rates for the purchase price.
For example, if you’re buying a leasehold property for £500,000 as an investment, you would pay the standard 5% SDLT rate on the portion between £250,001 and £925,000, plus the additional 3% surcharge, resulting in a total SDLT rate of 8% for that portion.
Key Takeaways for Leasehold Buyers
- SDLT on the purchase price of a leasehold property is calculated similarly to freehold properties.
- Additional SDLT may apply based on the Net Present Value (NPV) of future rent payments.
- First-time buyers can benefit from SDLT relief, while investors should consider the 3% surcharge for additional properties.
Understanding how SDLT applies to leasehold properties is essential for accurately budgeting your purchase. The additional complexities of leasehold transactions, such as ground rent and lease premiums, make it important to plan for any potential SDLT liabilities during the buying process.
