Stamp Duty Land Tax – Holding Over
Pre-let Agreement and Rent Reviews
As we approach the fifth anniversary of the introduction of Stamp Duty Land
Tax (“SDLT”) we are beginning to see the holding over of Leases granted
under the SDLT regime. As a result, there are a number of issues concerning
holding over that we felt we ought to draw your attention to. In passing we
felt it would also be useful to draw your attention to some SDLT issues
concerning rent reviews and early occupation under agreements for lease.
HOLDING OVER
General Principles
1. Stamp Duty Leases
Leases that were completed before 1 December 2003, or were
completed pursuant to an Agreement for Lease that pre-dated the 1
December 2003, were and continue to be governed by the Stamp
Duty regime, as opposed to the SDLT regime. Therefore the
general principle is that when holding over under a Landlord & Tenant Act 1954 Act (the “1954 Act”) protected tenancy, as long as
none of the terms of the Lease are varied nor the rent increased,
then no action need be taken for the purposes of Stamp Duty
or SDLT.
2. Stamp Duty Land Tax Leases
Leases entered into after 1 December 2003, other than pursuant
to an Agreement for Lease pre-dating 1 December 2003, were
and continue to be governed by the SDLT regime.
On the first day of holding over under a 1954 Act protected
tenancy, the original term is deemed to be increased by one year.
The original amount of SDLT payable must therefore be
re-calculated, and if any additional SDLT is due a return will have
to be submitted to Revenue & Customs within 30 days of the first
day of holding over.
3. Leases not protected by the 1954 Act
If holding over occurs under a lease that is not protected by the
1954 Act, whether it is a Stamp Duty lease or an SDLT lease, that
period of holding over is treated as a tenancy at will, so is exempt
from SDLT.
If however, rent is paid at regular intervals during that period of
holding over, a periodic tenancy may be deemed to have arisen,
which is treated for the purposes of SDLT as a lease for a term
of one year. In such circumstances it will be necessary to check
whether SDLT will be payable, and if so a Return will need to be
submitted within 30 days of the periodic tenancy arising together with the SDLT due. At each anniversary of such a periodic tenancy (until the position is formalised with
a new lease) an additional year is deemed to be added to the term for SDLT purposes, and the same
process of calculating if any SDLT is due needs to be undertaken.
Increased/Interim Rent
1. Stamp Duty Leases
If during a period of holding over under a 1954 Act protected tenancy which is governed by the Stamp
Duty regime, any interim rent becomes payable or the rent is voluntarily increased, then for the
purposes of SDLT a new one year lease is deemed to be created. The rent payable under that deemed
one year lease will be the amount of the increase in rent compared with the previous level of rent.
As before, if SDLT is payable on that increase, then a Return must be submitted and the SDLT paid
within 30 days of the determination or agreement of the increase. Again, on the anniversary of the
date on which the increased rent was payable, the term of the deemed lease, is for SDLT purposes,
increased by a further year and the whole process of calculating the SDLT and submitting a Return must
be repeated.
2. Stamp Duty Land Tax Leases
If the rent is increased during holding over, the SDLT payable for the original term and the holding over
must be re-calculated. As before, any additional SDLT must be paid and a Return submitted within 30
days of the increase.
GRANT OF LEASE FOLLOWING HOLDING OVER
1. Stamp Duty Leases
When the new lease is eventually granted, following the holding over of a 1954 Act protected Stamp
Duty lease, for SDLT purposes the new term commences on the date of grant. The fact that the term
commencement date may be backdated to the end of the term of the original lease is ignored.
The SDLT payable on the rent and any premium for the period after that deemed term
commencement, is calculated in the usual manner.
However, any rent increase, paid for the pre-grant period is either treated as a variation of the
original lease or more rarely as consideration for the grant of the new lease, depending on the facts
in each case. If it is treated as a variation of the original lease, and SDLT is payable on the increase,
then a further Return would have to be made and the SDLT paid within 30 days of completion.
In most cases, though it is treated as a premium for the grant of the new lease; this is unlikely in
most cases to go beyond the nil rate band, but will nevertheless have to be included in the Return
made on the grant of the new lease. In either case, though, there is no overlap relief, so there
is potential requirement to pay SDLT twice on the same sums.
An added point that needs to be borne in mind is the so called “5 year rule”. When calculating
the SDLT on the rent due under a lease, any rent reviews that take place later than 4 years and 9
months from the commencement of the term of the lease (or the deemed commencement of the term) are effectively ignored for the purposes of the initial calculation and only need to be re-visited if there
is an abnormal increase in rent on those reviews. The problem with the term commencement date
being deemed under Stamp Duty leases to be the date of grant is that there is the potential for rent
reviews as a result to fall within 4 years and 9 months of that date. In such circumstances the rent
payable following the review, and any subsequent reviews have to be estimated on the original return
and the additional SDLT paid for those increases at the time of that initial return. In most cases the
net result is a larger SDLT bill. Furthermore, when the review falls due, if the reviewed rent has not
been settled by the review date then a further Return has to be made, with another estimate, within
30 days of the review date. And once the review is settled, another Return has to be made with any
additional SDLT payable, within 30 days of settlement. In other words, not only is there likely to be
more SDLT to pay, there will be more administration to deal with.
2. Stamp Duty Land Tax Leases
On the grant of the new lease following the holding over of an SDLT lease, whatever term
commencement date is specified in the leases is treated as the commencement date for SDLT purposes.
So if the term commencement date is backdated, any rent payable for that pre-grant period is simply
treated as rent for the purposes of the SDLT calculation, with overlap relief being available for any SDLT
already paid for that period. Furthermore, unless a review was scheduled to occur earlier than 5 years
from the term commencement date, there will generally be no problem with the ‘5 year rule’.
If however the term commencement date is not backdated, then the issues regarding any rent increase
for the pre-grant period and those concerning the ‘5 year rule’ arises as above.
PRE-LET AGREEMENTS
For SDLT purposes, the lease to be granted under an Agreement for Lease is deemed to have been granted
when:
- The tenant takes possession of the whole or substantially the whole of the subject matter
of the contract, or
- A substantial amount of the consideration is paid or provided; or
- The first actual payment of rent is made.
In most cases, the deemed grant will be triggered by going into occupation, such as for fitting out.
At that point for SDLT purposes a deemed lease arises and an SDLT return has to be made within 30 days of the
date of occupation. If at that stage the start and end dates of the agreed form of lease can be ascertained,
then the term of the deemed lease will be that term. If the term cannot be ascertained, for example because
it is referable to practical completion of Landlord’s works, then the term will be deemed to be one year.
In either scenario, any rent and premium payable under the agreed terms of the lease, will be those payable
under the deemed lease. If the rent and any premium are not ascertained, for example because they are
referable to measurement of the premises following practical completion, then they must be estimated.
Where the start and end dates under the Lease can be ascertained, there is likely to be more SDLT to pay than
if not. In this instance, uncertainty is more tax efficient!
A further issue relates to the ‘5 year rule’. On the grant of the lease following occupation under an Agreement for
Lease, another Return has to be made with any additional SDLT payable,
within 30 days. However, overlap relief will apply to the SDLT already paid
in the previous Return(s). The potential problem, though, with the ‘5 year
rule’ arises if at the time of the grant there are less than 4 years and 9
months until the first review. In other words if, as is quite usual, the term
commencement date, and therefore the review dates are backdated to the
date when the tenant went into occupation, and this means that a review
takes place within 4 years and 9 months of the grant of the Lease, then as
above, the process of estimating rent following review, and submitting
multiple returns at review will have to be followed.
OTHER RENT REVIEW ISSUES
The problems concerning rent reviews taking place within 4 years and 9
months of the date of the grant of a Lease are touched on above.
Even if a Lease benefits from the ‘5 year rule’, there are still, though,
potential SDLT traps for the unwary.
In short, if the rent is increased at a rent review after the fifth year of the
term of the Lease, and the Lease benefits from the ‘5 year rule’, a fresh
return is only required if the increase is abnormal.
The formula for determining whether the increase is abnormal is as follows:
(R x Y) ÷ 5
R being the rent previously taxed and Y being the number of whole years
elapsed between the start date and the date of the rent increase. Broadly
speaking an abnormal increase is one that exceeds 20% of the rent
previously taxed per annum.
As for any other changes in the rent, such as a switch from turnover to
market rent or a simple increase in the rent by Deed of Variation, advice
should be sought on a case by case basis as to whether or not there is any
SDLT liability.
Even after five years, the application of SDLT in many areas is not widely
understood, and so represents a minefield for the uninformed or unwary!
If you would like further information on the content of this newsletter
please contact James Daglish on 0207 404 0606 or jdaglish@gdlaw.co.uk.
This is a guide for general information and interest and should not be relied upon as providing specific legal advice.
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