Stamp Duty Land Tax (SDLT) was introduced on 1 December 2003. An SDLT anti-avoidance rule applies, if, following the end of the fifth year of the term of a lease the amount of rent payable under the lease increases by an abnormal extent. If that is the case then an additional amount of SDLT will have to be paid. These provisions were designed to prevent taxpayers from avoiding SDLT by artificially depressing the rent during the first five years of the term. These provisions are likely to apply for the first time for leases that have their first rent review on or shortly after 1 December 2008.
What is an abnormal rent increase?
The test for what is an abnormal rent increase is not straightforward. Generally, an increase of more than 20% is considered abnormal. The exact calculation involves working out 20% of the highest rent on which SDLT has been paid before the increase in rent. This figure is then multiplied by the number of years between the date on which that rent was first payable and the date of the rent increase. If the resulting figure is less than the increase in the reviewed rent, the increase is considered to be abnormal.
A company is granted a 10 year non-residential lease on 12 December 2003 with the lease commencing on that date. The annual rent is £100,000 for years one to three inclusive, £120,000 for year four and £140,000 for year five. In year six, the rent increases to £170,000. The rent is not subject to VAT.
The increase in the reviewed rent is £30,000 (£170,000 – £140,000).
The rent previously taxed is £140,000, being the highest rent in any consecutive 12 month period in the first five years of the term of the lease. The number of years between the start date of this rent (i.e. 12 December 2007) and the date when the increased rent becomes payable (12 December 2008) is one. This gives a comparison figure for the calculation of an abnormal rent of
(140,000 x 1)/5 = £28,000
This figure is less than the increase in the reviewed rent so this is an abnormal rent increase. As a result, a deemed lease is treated as granted on 12 December 2008 for a term of five years, being the unexpired residue of the term of the lease for a rent of £30,000 per annum. This also means that the original return made following the original grant in 2003 will have to be amended and further SDLT is due. Both the amended return and SDLT are due by 11 January 2009.
How can an abnormal rent increase occur?
The rent is likely to increase upon a rent review. The rule applies equally to geared rents, stepped rents and leases with turnover rent. An abnormal rent increase could also arise pursuant to a deed of variation of the lease or any other mechanism.
What is the effect of an abnormal rent increase?
Where an increase is treated as abnormal such rent increase is deemed to constitute the grant of a new lease in consideration of the excess rent. The lease is deemed to be granted on the date on which the increase in rent first becomes payable for a term equal to the unexpired residue of the term at that date.
What does this mean for my business?
Upon any increase in rent a calculation should be carried out to check whether the rent increase is abnormal. If so, then further SDLT returns and SDLT payments may have to be made after each and every abnormal increase. Any additional SDLT is due within 30 days of the date the increased rent first becomes payable. Failure to do so will result in the late submission of the SDLT return and may incur penalties and interest charges.
HM Revenue & Customs are working on an on-line calculator for abnormal rent increases and on detailed guidance notes.