New SDLT burden for private renters

At the moment, private residential leases are usually assured shorthold tenancies for one or two years’ duration. Where a tenant stays beyond that term, a new lease is typically negotiated. There are usually no SDLT obligations for the tenant. This is because the net present value of the rent for the initial one or two years does not exceed £125,000 for the vast majority of rented properties. £125,000 is the threshold for paying tax, and if there is no tax to pay on a short lease there is no reporting obligation. If the tenant continues in occupation under a new lease, the rents under the new lease are usually (if the new lease is negotiated independently from the original lease) treated in the same way on a standalone basis – i.e. the rents of the old and new lease are not added together to establish if the £125,000 threshold has been passed.

When the Renters’ Rights Act becomes law on 1 May 2026, existing assured shorthold tenancies and new occupational residential leases in England will in most cases become periodic tenancies. For SDLT purposes a periodic lease is treated as a one year lease initially, then a two year lease and so on while the tenant remains in occupation. As there is always only one lease, the net present value of the rent chargeable to SDLT accumulates over the years. When that figure exceeds £125,000 SDLT at 1 percent (for an SDLT resident individual) will apply on the excess.

In most cases (i.e. unless the rent is unusually high) it is not expected that the SDLT will be a significant amount. For example, the average annual rent for a three-bedroom property in Kensington or Westminster is around £48,000. The tenant would pay no SDLT in the first two years of the periodic lease, £95 in the third, £418 in the fourth, £404 in the fifth and then less and less each year as the net present value discount increases. Increases in rent during the first five years of the lease may counteract the declining annual SDLT payment but after five years rent increases are ignored.

Once tax becomes payable, an SDLT return must be filed and the tax paid within 14 days of the end of the year in which the lease first becomes chargeable to tax and thereafter annually within 30 days of the end of each year. In some cases, the penalties for non-compliance may be greater than the SDLT payable, with initial fixed penalties of up to £200 followed eventually by tax geared penalties on top of interest on late paid tax.

It seems likely that many taxpayers will miss their SDLT obligations as, in most cases, they will not bite until some years after the lease is granted, once advice on SDLT (if any is obtained at all) has been forgotten. The SDLT payments are not expected to generate material revenue for the Treasury and so may not justify the combined compliance and enforcement burden on the taxpayer and HMRC respectively. It is possible the SDLT legislation could be amended to exclude all periodic tenancies of residential property from the charge and reporting obligations, similar to the position in Scotland and Wales. However, there is no indication yet of that happening. Private renters and employers entering into residential tenancies on behalf of employees will, for now, need to review their SDLT position each year to establish when the £125,000 threshold is exceeded and then file annual SDLT returns thereafter, paying the SDLT, until their periodic tenancy ends.