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SDLT and leases: five years and counting
27 November 2008
On 1 December 2008, Stamp Duty Land Tax (SDLT) celebrates its
fifth birthday, but it may not be a case of many happy returns for
some tenants. This fifth anniversary will bring into focus two
parts of the existing rules on SDLT and leases, in some cases
moving them up the priority ladder and in others seeing these rules
impact for the first time. This could mean tenants having to pay
more SDLT, or possibly claim a refund, for leases granted on or
after the introduction of SDLT on 1 December 2003.
Rent in the first five years – variable or uncertain
etc
Where the rent for the first five years of the lease cannot be
worked out exactly at the outset, SDLT is paid up front on the
basis of a reasonable estimate of the likely rent for the first
five years. This could catch leases with turnover rents, rents
dependent on profits of the business, or leases with rent reviews
in the first five years which are not fixed, among others.
Unfortunately with these types of leases, that may not be the end
of the story as far as paying SDLT is concerned.
This is because on the earlier of:
- The date when the actual amount of rent payable in the first
five years can be worked out; or
- The end of the first five years of the lease
The tenant must look over the original SDLT estimate and compare
it with the SDLT payable based on the actual rent for the first
five years.
There will be broadly three outcomes of this review for the
tenant:
- If the original SDLT estimate was correct – no further action
required
- If it turns out that the original SDLT payment was an
underestimate – pay the extra SDLT and notify HM Revenue &
Customs
- If it turns out that the original SDLT payment was an
overestimate – claim a refund of the excess SDLT from HM Revenue
& Customs
Abnormal rent increases after the first five
years
Where there is a rent review more than five years from the start
of the lease, that gives a rent increase which is ‘abnormal’, the
tenant will have to pay further SDLT. ‘abnormal’ here broadly means
where the increase is equivalent to at least 20% per annum since
the date of the start rent, or the date of any intermediate rent
reviews or increases. If the tenant has an ‘abnormal’ rent
increase, it has to pay further SDLT, based on the amount of the
increase and the remainder of the term.
Timings and deadlines
So because leases falling within SDLT will start to reach the
end of their first five years for the first time, as of 1 December
2008 these rules need to be kept much more in mind.
For both of these situations, if a further payment of SDLT or a
return has to be made to HM Revenue & Customs, it should be
made within 30 days of the relevant trigger event, i.e. when you
work out the actual rent payable for the first five years, or the
end of that first five year period, or when an ‘abnormal’ rent
increase occurs. If that 30 day deadline is not met, interest and
penalties may be charged in the usual way by HM Revenue &
Customs.
Things to do now
Tenants should review their leases which were granted on or
after 1 December 2003 and check the following:
- Was the rent for the first five years uncertain or unknown at
the outset?
- If so, has that rent now been worked out exactly, or check when
the first five year period ends
- Do you need to pay more or claim a refund of SDLT as a result
of this review
- Diarise for any upcoming rent reviews taking place after the
first five years of the lease, to check for any ‘abnormal rent
increases’, and see if this could lead to further SDLT
payments
Tenants should also do these checks where they have taken an
assignment of a lease during its term. Whoever is the current
tenant at the time will be responsible for any of these possible
SDLT payments and filing requirements.
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general interest and information. It contains only brief summaries
of aspects of the subject matter and does not provide comprehensive
statements of the law. It does not constitute legal advice and does
not provide a substitute for it.