When buying a commercial property, you need to consider all the additional costs to the purchase price. One of these is any tax that is payable. In England and Northern Ireland, stamp duty is a tax that’s payable for property purchases. It’s well-known for being applied to residential properties, but do you pay stamp duty on a commercial property?
What is stamp duty?
Stamp Duty Land Tax (SDLT) is a tax that becomes payable when you buy property or land in England and Northern Ireland. It becomes due over a certain purchase price and is based on different price thresholds. The equivalent tax charged in Scotland is Land and Buildings Transaction Tax (LBTT), while Land Transaction Tax (LTT) is charged in Wales.
Do you need to pay stamp duty on a commercial property?
Stamp duty is payable on all commercial property or land transactions over £150,000. This applies to commercial property leases as well as freehold properties. Commercial stamp duty differs from residential stamp duty in that the rates are different and the thresholds are lower.
What is classed as commercial property?
These non-residential properties are classified as commercial when calculating commercial stamp duty:
- Offices
- Retail units
- Warehouses and factories
- Sheds
- Workshops and garages
- Fisheries
- Agricultural land that’s used for agricultural purposes or is part of a working farm. This is different from agricultural land that’s been purchased as part of a dwelling’s grounds or garden. In this case, residential stamp duty rates apply.
- Forests
- Mixed-use properties
- Any other property or land that isn’t part of a dwelling’s grounds or garden
- Properties that aren’t suitable to be lived in and cannot be made suitable
- Six or more residential properties that have been purchased in one transaction
What are the rates for stamp duty on a commercial property?
For non-residential and mixed-use property and land, a tiered system is used when calculating the stamp duty payable. The system differs depending on whether you’re making a freehold or a leasehold transaction.
Freehold commercial property transactions
The current SDLT rates for freehold commercial transactions are:
- £0–£150,000: 0%
- £150,001–£250,000: 2%
- Above £250,000: 5%
For example, when buying a freehold commercial property at £350,000, the commercial stamp duty that becomes payable is calculated as follows:
- 0% on the first £150,000: £0
- 2% on the next £100,000: £2,000
- 5% on the remaining £100,000: £5,000
Therefore, the total commercial stamp duty you need to pay for your freehold property purchase is £7,000.
These thresholds can also be used to work out the stamp duty rate for a lease premium.
New leasehold commercial property transactions
When buying a new non-residential or mixed lease, stamp duty is payable on both the:
- Lease purchase price: This is known as the lease premium and it’s calculated using the rates mentioned above.
- Annual rent: This is known as the net present value (NPV).
If you buy an existing lease, stamp duty is payable on the lease price only. The NPV is based on the total rent over the entire lease. If the NPV is less than £150,000, no stamp duty needs to be paid on the rent. The stamp duty calculations are as follows:
- £0–£150,000: 0%
- £150,001–£5 million: 1%
- Above £5 million: 2%
When making multiple purchases or transfers via the same seller, a higher stamp duty rate may be payable.
When does commercial stamp duty have to be paid?
Your stamp duty return must be filed with HMRC and paid within 14 days of the completion of your purchase. Your solicitor can usually do this on your behalf on the day of completion and add the tax amount to their fees. This ensures that you don’t miss the payment deadline and risk being charged interest and penalties as a result.
Can you benefit from any commercial stamp duty relief or exemptions?
There are circumstances when you can benefit from relief or exemption from stamp duty. For example, stamp duty on a commercial property isn’t payable if the purchase price is £150,000 or less. An exemption applies if the property has a lease of at least 7 years as well as a premium that’s under £40,000 and an annual rent that’s less than £1,000.
You may be eligible for other ways to minimise your stamp duty bill or even eliminate it. Some examples include:
- Group relief: For property transfers between companies within the same group, relief can be claimed if the buyer and seller belong to the same group at the time of the transaction. This is to avoid double taxation. Stamp duty may not even have to be payable at all.
- Charities: Full relief can be claimed for qualifying purchases by registered charities.
- Property investment funds: Certain funds may qualify for stamp duty relief, such as property authorised investment funds (PAIFs) and co-ownership authorised contractual schemes (CoACS).
- Compulsory purchases: Where local councils acquire land or property through a compulsory purchase order, stamp duty relief usually applies to avoid a double stamp duty charge being made.
- Freeports and investment zones: In areas where business investment is needed, relief or exemptions may be offered.
Check with your legal adviser as to whether any relief or exemptions apply to your commercial property transaction.
Realise your business ideas with the right commercial finance
Factoring in the stamp duty when buying your commercial investment not only helps you to budget but also ensures you avoid unexpected costs straight after completion. To help get an idea of what you’ll need to pay, use our commercial stamp duty calculator. It’s recommended to speak with a tax adviser to remove any complexities and ensure compliance while maximising your returns.
Whether you’re ready to buy new business premises to trade from, expand your business operations or invest in a commercial space to rent out, we can arrange the finance you need. Just give our commercial specialists a call on 01322 907 000 for a tailored solution to support your property goals.