Substantial Performance in Stamp Duty

What is Substantial Performance

Substantial performance is a critical concept in Stamp Duty Land Tax (SDLT). It occurs when a property transaction is treated as effectively "completed" for SDLT purposes, even before legal completion.

Once substantial performance occurs, SDLT becomes payable within 14 days, and you must file an SDLT return with HMRC—regardless of whether contracts have formally completed.

Substantial performance is most relevant in:

• Off-plan or new-build purchases with stage payments
• Leasehold grants where rent or possession precedes formal documentation
• Transactions where buyers occupy property before completion (e.g., by informal licence)

Three Triggers for Substantial Performance

Substantial performance occurs when any one of the following three conditions is met:

1. 90% Payment Trigger

If you pay 90% or more of the total consideration (purchase price, premium, or other chargeable consideration) before completion, substantial performance is triggered.

This trigger is common in development purchases where developers require substantial payments before legal transfer of title.

2. Possession Trigger

If you take possession or occupy the property before legal completion, substantial performance occurs.

"Possession" is defined broadly and includes:

• Physically occupying the property (moving in, even temporarily)
• Receiving rental income from the property
• Carrying out works or improvements
• Allowing a third party to occupy under your control

Even informal occupation—such as storing furniture or starting renovations with the seller's permission—can trigger substantial performance.

3. Rent Commencement Trigger (Leases Only)

For leasehold grants, substantial performance occurs when rent payments commence under the lease, even if the lease has not been formally granted.

This is particularly relevant in commercial lettings, where tenants often occupy and pay rent while lease documentation is being finalized.

Effective Date Determination

The effective date is the date from which the 14-day SDLT filing deadline is calculated. It is the earlier of:

• The date of substantial performance, or
• The date of legal completion

If substantial performance never occurs (i.e., no 90% payment, no possession, no rent), the effective date is simply the completion date.

Impact on SDLT Rates and Reliefs

The effective date determines:

• Which SDLT rates apply (important if rates change between exchange and completion)
• Eligibility for reliefs (e.g., first-time buyer relief assessed at effective date)
• Start of the 14-day filing deadline

If SDLT rates increase between exchange and completion, substantial performance before completion locks in the old rates. Conversely, if rates decrease, you benefit only if completion occurs before substantial performance.

When Substantial Performance Differs from Completion

In many cases, substantial performance and completion occur simultaneously, so the distinction is irrelevant. However, there are scenarios where they differ:

Scenario 1: Early Possession

Buyer exchanges contracts but is allowed to move in two weeks before completion. Possession triggers substantial performance. SDLT is due 14 days after moving in, even though completion is two weeks later.

Scenario 2: Stage Payments on New Builds

Buyer purchases off-plan property for £600,000. Developer requires:

• 10% deposit on exchange: £60,000
• 40% on practical completion: £240,000
• 50% on legal completion: £300,000

After the second payment (total £300,000 = 50%), no substantial performance yet. But if a third stage payment brings total to £540,000 (90%), substantial performance triggers, and SDLT is due within 14 days—even if legal completion is months away.

Scenario 3: Delayed Completion with Rent

Buyer agrees to purchase leasehold flat. Lease grant is delayed, but buyer takes possession and starts paying ground rent. Rent commencement triggers substantial performance. SDLT on premium and NPV of rent is due within 14 days.

Off-Plan Purchases

Off-plan purchases (buying property before it is built) frequently involve substantial performance issues because developers often require stage payments during construction.

Common Payment Structures

• Exchange: 10% deposit
• Start on site: 10% (total 20%)
• Roof level: 20% (total 40%)
• Practical completion: 50% (total 90%) ← Substantial performance triggered
• Legal completion: final 10%

Once 90% is paid, SDLT is due. If completion is delayed, you must file and pay SDLT at that stage. When completion finally occurs, you file a further return if additional SDLT is payable (e.g., price adjustment, or final payment crosses a threshold).

HMRC Compliance Expectations

HMRC expects strict compliance with substantial performance rules. Even if substantial performance was unintentional (e.g., buyer unaware that early possession triggered SDLT), penalties apply for late filing.

Filing Requirements

When substantial performance occurs:

• File an SDLT return (SDLT1) within 14 days
• Pay SDLT due based on consideration at that date
• If completion later occurs at a higher price, file a further return (SDLT4) for additional SDLT within 14 days of completion

Record Keeping

Maintain clear records of:

• All payment dates and amounts
• Dates of possession or occupation
• Rent commencement dates (for leases)
• Correspondence confirming arrangements

Your solicitor should track these dates, but ultimate responsibility lies with the buyer to ensure timely filing.

Penalties for Late Filing

Failing to file an SDLT return within 14 days of substantial performance incurs automatic penalties, even if the failure was innocent.

Penalty Schedule

• Up to 3 months late: £100 fixed penalty
• 3 to 6 months late: £200 fixed penalty
• 6 to 12 months late: Additional daily penalty of £10/day (capped at 90 days = £900)
• Over 12 months late: Tax-geared penalty up to 100% of SDLT due, depending on HMRC's assessment of behavior (innocent, careless, or deliberate)

Interest Charges

Interest accrues on unpaid SDLT from the filing deadline at HMRC's prescribed rate (currently around 7% per annum). This compounds daily.

Common Questions