Will I have to pay the 3% Stamp Duty Land Tax Surcharge to extend the lease of my main residence?
The answer is more than likely yes if the following criteria are satisfied:
Your new lease has a term of more than 7 years.
The premium you are paying for your new lease is more than £40,000.
You own another residential property, in the UK or otherwise, which has a market value of more than £40,000.
The legislation introducing the 3% surcharge came into force in March 2016 and applies to both voluntary and statutory lease extensions. In relation to statutory claims, the legislation applies where the notice of claim was served after 25 November 2015.
A Google search indicates that some leading practitioners suggest that the surcharge will not apply, whether the above criteria are satisfied or not, provided that the leaseholder is extending the lease of their main residence.
Logically, that analysis makes sense given that the surcharge was intended to apply to purchases of additional residential properties. Indeed, there is an express exception to the surcharge in circumstances where the purchaser is replacing their only or main residence. However, a guidance note issued by HMRC on 29 November 2016 indicates that the nature of a lease extension transaction (a surrender of the existing lease and the payment of a premium in return for the grant of a new lease) does not amount to a ‘replacement’ of a leaseholder’s main residence. The reasoning being that the flat itself has not actually been replaced, only the lease. As such, based on the guidance issued by HMRC, the legislation must be interpreted strictly and the surcharge will apply if the above conditions are satisfied.
A common example that illustrates the treatment of lease extensions in contrast to other purchases is when an individual purchases a short lease of a flat, which is to be their main residence, and subsequently extends their lease. The purchase price will not attract the surcharge if the purchased property is a replacement of the purchaser’s main residence. However, when the lease of that main residence is subsequently extended, the premium paid will be subject to the surcharge.
The above assumes that the leaseholder is an individual. If the leaseholder is a company, only the conditions numbered 1 and 2 above need be satisfied in order for the surcharge to apply, there is no requirement for the company to own more than one residential property.
The guidance should serve as a caution to all those practitioners who are not adopting a strict interpretation of the legislation and paying the additional 3% in stamp duty land tax where their client owns more than one property, even if the lease extension relates to their main residence. Unless HMRC issues further guidance to the contrary, leaseholders should be advised to pay the surcharge where they own another property and the lease extension premium is in excess of £40,000.
Amy Chance, Solicitor and George Calvert, Solicitor at Pemberton Greenish LLP