If you’re interested in buying a non-residential property like shops, offices, or work units, there is so much to do and think about you may not be aware of whether you are required to pay stamp duty on your commercial property. In most cases, buyers will be subject to tax liability, so in this article, we’ll be looking at who has to pay the levy and how they can do so.
What is considered to be a non-residential property?
The definition of a commercial property might seem like a simple one, but for the purposes of UK taxes it is broader ranging than just a ‘property that isn’t lived in’. It generally includes:
- Shops and offices
- Land that is part of a working farm or used for different agricultural reasons
- Any other property or land that isn’t part of a dwelling’s grounds or garden
- Property that isn’t suitable for living in, such as a garage
- Six or more residential properties that are purchased in a single transaction
- Commercial and residential properties that are mixed-use, e.g., a flat that is connected to a shop, doctors’ surgery, or office
Are you required to pay stamp duty on commercial property?
For commercial property, the nil-rate band is £150,000, for anything above that you will need to pay stamp duty on increasing portions of the purchase price. Even for a lot of transactions that are less than £150,000, you will be required to fill in an SDLT (stamp duty land tax) return.
These terms apply in England and Northern Ireland. In Scotland, you will pay land and buildings transaction tax, and in Wales it’s land transaction tax. Commercial stamp duty rates will apply not matter if you’re purchasing the building outright as a freehold or getting a lease.
Commercial stamp duty rates
- Up to £150,000- 0%
- £150,001 to £250,000- 2%
- £250,001 and above- 5%
Commercial property purchases
In England, if you purchase a commercial property outright, the amount of stamp duty you will pay is based on the value of your property and the rates above will apply. Land transaction tax (LTT) in Wales is a bit different with the rates below being applicable:
- Up to and including £225,000: 0%
- More than £225,000 up to and including £250,000: 1%
- More than £250,000 up to and including £1 million: 5%
- The amount over £1m: 6%
Additionally, the land and building transactions tax (LBTT) in Scotland has differing rates of commercial stamp duty:
- Up to £150,000: 0%
- £150,000-£250,000: 1%
- More than £250,000: 5%
When working out the SDLT that is payable on a commercial property, the calculations can be complex because the tax can be charged on outright property purchases, the price of acquiring a new lease (the lease premium), or the cost of an existing lease. If you have any questions about stamp duty, commercial conveyancing, or anything else related to buying a non-residential building, our team of commercial conveyancing solicitors at Toomey Legal can help.
Commercial property leases
The rules surrounding SDLT rates become more complicated if it involves a commercial lease. This is because the payable stamp duty amount is worked out based on several variables including:
- The length of the lease term
- Any premium paid for the lease
- Annual rent
Any VAT you have paid is also included in the calculation. If you purchase a lease that already exists, you only need to pay SDLT on the purchase price. However, if you get a new non-residential or mixed leasehold, you will be charged tax on both the buying price of the lease and the value of the rent you pay yearly (the “net present value”).
When you have determined the value of the lease, stamp duty is payable based on its value. You don’t pay anything below £150,000, and anything between £150,001 and £5 million will be charged at 1%. For any amount worth more than £5 million, you need to pay 2%.
Does a holiday let count as commercial property?
If you are purchasing a property with the intention of renting it out as a holiday let, you will pay residential rates of stamp duty in the majority of cases. Although, it is important to note that if you rent it out for more than 140 days of the year, you will be required to register for business rates.
If you acquire more than six holiday lets at the same time, you will be liable to pay commercial SDLT. Buying a bed and breakfast property can also attract commercial rates too.
Stamp duty on holiday lets
The rate of stamp duty for buying a holiday let is the same as for purchasing any residential building as a second home. Currently, these properties can take advantage of the stamp duty holiday (up to the price of £250,000). However, because a holiday let is classed as a second home, you will have to pay a surcharge of an additional 3% of the cost of the property, as well as normal stamp duty rates.
Is there any way to avoid stamp duty on commercial property?
Becoming exempt from stamp duty on a commercial property is tricky unless you can negotiate the price of the building or lease down to less than the £150,000 threshold. One way to do this is by paying for fixtures and fittings separately, but you should speak to a specialist solicitor like our team for advice if you intend to organise a deal like this.
Also, it is worth noting that rates are lower than they are for residential property, especially where second homes are involved. So, the cost might not be as high with non-residential property, even if you can’t benefit from the stamp duty holiday.
Can you claim back stamp duty?
Those buying second homes can claim back the additional 3% surcharge if they sell their main residence less than three years after completing on a new house. It is unlikely that this will apply to holiday lets, which are otherwise counted as residential transactions. A possible exception to this would be if you purchase a second home, use it as a holiday let for a short while, then sell your main home and move into it.
If you need any help with buying a commercial property or have any other questions, contact our friendly team today. Our online conveyancing process is quick, and efficient, and ensures the process of buying your property goes as smoothly as possible.