Seek Advice Over That Business Lease16.09.2008
Tenants under business leases must be aware of their Stamp Duty Land Tax (‘SDLT’) obligations in terms of payment and filing additional returns during the term of the lease and on holding over.
SDLT is payable on the net present value (‘NPV’), effectively the sum of the rent payable over the full term of the lease subject to a discount.
Where a tenant holds over following the expiry of a lease under Landlord and Tenant Act 1954 rights, for SDLT purposes such a period is treated as a one year extension of the original lease. So if the original lease was granted after 1 December 2003 and therefore potentially taxable under SDLT rules then the extended lease is potentially taxable.
Effectively the NPV calculated on the original lease will be increased by an additional year’s rent. This may increase the SDLT payable on the rent. If this is the case, the tenant must notify HM Revenue & Customs (‘HMRC’) and pay any additional SDLT due. If the holding over extends to subsequent years, a similar calculation needs to be made and notification given each year more tax is due.
Overlap relief may be claimed if a lease is subsequently granted with backdated start date to the end of the old lease. These provisions do not apply to leases contracted out of the Act as the tenant remaining in occupation after the expiry of such a lease will be treated as a tenant at will and not liable for SDLT. When calculating SDLT the estimate of the NPV is made based on the rent payable for the first five years of the term. If there is a rent review within this timeframe, the SDLT payable should be recalculated and if the transaction becomes notifiable, or any further SDLT is payable, then a further return must be submitted together with payment of the SDLT with interest. Conversely if there is a rent decrease and too much SDLT paid then the overpayment can be reclaimed.
After the first five years of the term (and also in the last three months of the first five years of the lease) rent reviews are not taken into account for SDLT purposes, unless the increase is regarded as abnormal, which is defined as an increase of more than 20 per cent. Such increases are deemed to represent the start of a new lease, effective from the date the increase in rent becomes payable for a term equivalent to the unexpired residue and a new return must be submitted together with payment of SDLT.
Other variations that must be notified and may attract an SDLT charge include an increase in the term of a lease, an increase in the extent of the demise and any other variation of the lease for which the tenant gives any consideration in money or money's worth.
Needless to say, a failure to meet the obligation to notify HMRC and pay further SDLT due will result in penalties.