A loophole in stamp duty rules could hit thousands of renters with an extra tax bill under reforms to the property system being pushed through by Labour.
Government ministers are seeking to address an unintended consequence within the Renters’ Rights Act before it takes effect in May.
The legislation will transform most private tenancies in England into open-ended arrangements, eliminating fixed-term contracts that often trap renters in unfavourable agreements.
This reform package aims to provide greater security for tenants, abolishing so-called “no-fault evictions” and establishing a dedicated ombudsman for the rental sector.
Britons are being warned about a hidden stamp duty charge which could hit renters
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However, analysts warn that current tax regulations create a complication for those who are supposed to benefit from the Bill.
Indefinite tenancies require yearly stamp duty assessments, with the levy becoming payable once the total rent exceeds £125,000. Ministers are now working to resolve this before implementation.
Currently, this threshold affects relatively few renters since most hold short fixed-term agreements. That situation will change dramatically under the new system.
Dan Neidle, who leads the think-tank Tax Policy Associates, estimates that 150,000 privately renting households could face stamp duty liability within three years. By 2031, this figure could climb to 250,000.
The tax applies at one per cent on the “net present value” of rent exceeding the 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,” Mr Neidle said.
The complexity becomes clear through a practical illustration. Eight friends sharing a London rental property, each contributing £1,000 monthly, would collectively pay £96,000 annually.
Under the new periodic tenancy rules, this arrangement would trigger a £573 stamp duty bill after just over twelve months.
Many tenants may not realise they face this obligation, as stamp duty is typically associated with property purchases rather than renting.
Renters are suppose to benefit from Labour’s latest reforms
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GETTYPenalties compound the problem: late filing attracts an automatic £100 fine, rising to £200 after three months.
Mr Neidle noted that reaching the threshold would take the average London tenant approximately six years.
A Government official acknowledged that the newly created periodic tenancies could indeed attract stamp duty liability.
However, they maintained that the “vast majority” of private renters would never reach the threshold, partly because renegotiating a lease resets the calculation period.
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Any amendments to accommodate the reformed tenancy system would be announced in a future Budget, the official added.
Mr Neidle cautioned that finding a straightforward fix would prove difficult, as ministers must avoid inadvertently cutting taxes on expensive properties.
One proposed solution involves deferring filing requirements until stamp duty liability reaches £5,000.
A Government spokesperson confirmed: “The department is aware of the potential issue and we are looking at how best to resolve it.