SDLT: Tax Tips for Tenants - Early Occupation

The Stamp Duty Land Tax (SDLT) regime in relation to commercial leases can surprise many tenants. The rules surrounding SDLT are complex and oversight can lead to unexpected penalties.

In England, tenants should be mindful of a few common SDLT pitfalls associated with:

• early occupation of premises;
• rent review timing, especially when reviews are index-linked; and
• remaining in occupation after the lease has expired.

This article is the first of a three-part series which aims to explain each of these common scenarios and highlight what to watch out for to ensure compliance with HMRC regulations.

Early Occupation

Early occupation of premises before the formal grant of a lease can have important SDLT consequences for commercial tenants. Often, tenants will seek to take early occupation for the purposes of carrying out fit-out works in preparation for the commencement of their lease term. Crucially, the SDLT position in relation to taking early occupation depends on whether there is a contract, known as an agreement for lease.

SDLT filing obligations are triggered on what is known as ‘the effective date’ and an SDLT return must be submitted to HMRC within 14 days of that date. So, what is the effective date? Simply put, it is usually the date of completion of a land transaction. However, if there is an agreement for lease and this is ‘substantially performed’ before completion, the effective date is the earlier date of substantial performance.

Substantial Performance

Taking possession is one of the ways in which a contract can be specifically performed, which triggers filing obligations and the liability to pay any SDLT that may be due. An agreement for lease will be substantially performed when a tenant, or person connected with the tenant, takes possession of the whole or substantially the whole of the land.  However, if the tenant already possesses the land under a different interest, for example under a previous lease, substantial performance may not be triggered by that existing possession.

There is limited case law on the meaning of possession in the SDLT context, but the First-tier Tribunal considered the issue in Goldsmith Ltd and another v HMRC (2024). On the particular facts, the purchaser was found not to have substantially performed a contract despite having entered the property to carry out significant pre-completion works. There were various conditions attached to the purchaser’s early access such as restrictions on hours and a requirement to return the keys at the end of the day. As a First-tier decision, this is not a binding precedent, but the decision shows that there may be scope to avoid substantial performance with well-drafted and clearly defined restrictive licences to access land. However, the decision also highlights the complexities of the SDLT legislation and tenants should always seek specialist advice about the implications of taking early access.  

Filing Obligations

When a contract is substantially performed, a “notional lease” is deemed to be granted, beginning on the date of substantial performance and ending on the end date of the term of the actual lease. The SDLT calculation differs depending on whether the end date of the actual lease is known on the date of substantial performance, as illustrated in the example below. 

SDLT will therefore need to be considered both at the date of the notional lease and the date of the actual lease. It will be fact specific in each case as to whether a land transaction return must be filed and whether any tax is due; this will depend upon the term of the lease, any chargeable consideration (other than rent) and the amount of rent.

Example

Tenantco Limited enters into an agreement for lease on 1^st January 2026, which provides that a lease will be granted on 1^st July 2026 for a term of 10 years at a rent of £200,000 per annum. No premium is payable on the grant of the lease. However, on 1^st February 2026, Tenantco Limited is given the keys to the premises so that they may conduct their fit-out works. In this case, the term dates of the lease are known, and the end date can be ascertained as being 30^th June 2036. Therefore, Tenantco is required to submit an SDLT return in respect of the full period of occupation from 1^st February 2026 to 30^th June 2036.

Now consider the same agreement for lease, but the parties have agreed that the lease will only be granted once the conditions set out in the agreement for lease have been  satisfied. Tenantco still gains access to the premises on 1^st February 2026 but the start and end dates of the lease are unknown at this point. Tenantco is required to submit an initial SDLT return on the basis of a one-year notional lease at a yearly rent of £200,000.

Given the complexity of the SDLT regime, tenants should always consider whether taking early occupation will impact the tax position as this could have significant cash flow implications in some cases.