article
When tax could be taxing
24 October 2008
Stamp Duty Land Tax (SDLT) marks its fifth
birthday on 1 December 2008.
Unfortunately the anniversary will be met with
mixed emotions as tenants with particular rental agreements could
be subject to increased SDLT whilst others may be in line for a
refund.
The anniversary brings into focus parts of the
SDLT rules which apply to leases where either the precise amount of
rent payable in the first 5 years was not known at the outset, or
where there will be an 'abnormal' rent increase after the first 5
years.
These rules were designed to counter SDLT
avoidance on leases, but apply across the board even if a tenant
has no tax avoidance motive. They have been part of the SDLT
legislation for some time but are only now moving up the priority
ladder or becoming relevant for the first time.
So if a property lease began on or after 1
December 2003 for a term of more than 5 years, it is probably a
good idea to open up the filing cabinet, dust down the lease and
check the SDLT position on it.
Take, for example, a company which decided to
sign a new lease of premises in December 2003, for a term of 10
years. The rent was initially £50,000 per annum, subject to
adjustment in the first 5 years depending on its turnover, with a
further rent review in year 7. The SDLT they paid at the outset
will have been based on an initial reasonable rental estimate.
But at the end of the first 5 years of the
lease term, or when the actual amount of the rent due in those
first 5 years becomes known, the company will need to compare the
actual rent paid or payable for the first 5 years with the estimate
they made at the time the lease was granted.
If they under-estimated the rent at the time,
they will probably have to pay more SDLT. If they over-estimated
the company could claim a refund from the Revenue. Interest
follows either way but with higher rates if payable to the
Revenue.
For the 7 year rent review coming up in this
example, because that is more than 5 years from the start of the
lease, the company will need to check at the time if it leads to an
‘abnormal’ rent increase. An 'abnormal' increase is roughly
equivalent to an annual increase of more than 20 per cent, but the
precise formula in the legislation should be checked.
So any business which signed a lease on or
after 1 December 2003 with an uncertain rent for the first 5 years
will need to check when the first five years ends, what the SDLT
position is on that rent, and also check whether any ‘abnormal’
rent increases are on the horizon.
The typical 30 day time limit applies to any further returns and
payments arising from these SDLT measures. Any delay may result in
significant penalty and interest charges so it is important to act
quickly and, if necessary, seek advice from a property tax adviser
at the earliest opportunity.
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