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UK ministers are working to resolve an anomaly in the Renters’ Rights Act that would otherwise leave hundreds of thousands of private tenants having to pay stamp duty in the coming years.
Under new legislation that comes into effect in May, most residential tenancies in England will continue indefinitely, with fixed-term tenancies that can leave tenants locked into unfair contracts abolished.
That is part of a wider package of reforms to give renters more security and stability, including an end to “no-fault evictions” and the introduction of a new ombudsman for the sector.
But under existing rules, an indefinite or “periodic” tenancy requires a stamp duty calculation every year, with the tax eventually becoming due if their cumulative rent payments hit £125,000.
At present, that only applies to a relatively small number of tenants given that the majority of renters usually have short fixed-term tenancies.
But Dan Neidle, head of think-tank Tax Policy Associates, has calculated that 150,000 households in private rental accommodation could become eligible for stamp duty within the next three years and rise to 250,000 by 2031.
Stamp duty is charged on all leases at 1 per cent of the “net present value” of the rent over the £125,000 threshold.
“The amount of tax will in most cases be very small, but calculating and filing the tax — and doing so every year — is something we believe most people won’t anticipate,” he said.
Many people would be unlikely to grasp the implications of the changes, not least because stamp duty is widely seen as a tax on those buying a property.
There is an automatic fixed penalty of £100 for late filing and £200 for filing after three months.
Neidle said it could take years for many tenants to reach the £125,000 threshold, with the average London tenant taking six years.
But he gave the example of eight friends sharing a rented student house in London, each paying £1,000 a month — or £96,000 a year. Under the Renters’ Rights Act the arrangement would become a periodic tenancy and just after a year would become eligible for stamp duty of £573.
One government official confirmed that the newly defined “periodic tenancies” could become liable for stamp duty, but insisted the threshold would never be reached for the “vast majority” of private tenants. In part that is because when a lease is renewed by renegotiation the term is deemed to have started again.
The official said any changes needed to “accommodate the new tenancy system” would be announced in a Budget.
Neidle said there was not a “simple procedural fix” for the problem, given that ministers would probably want to avoid an unintentional tax cut for high-value property or creating other anomalies.
One potential solution would be to defer any stamp duty filing or payment obligation until stamp duty reaches £5,000, which would limit payments to only the most expensive properties after many years.
A government spokesperson said: “The department is aware of the potential issue and we are looking at how best to resolve [it]. It is not an immediate problem for any tenant. No one will be affected until the rent they are paying is worth more than £125,000 — which would take most tenants more than seven years.”