Stamp duty land tax (SDLT), a self-assessed tax on land transactions in the United Kingdom, was introduced on 1 December 2003, replacing stamp duty on land transactions, and has now reached its fifth anniversary. This is an important milestone for tenants who have entered leases since 1 December 2003, as they may now be required to submit further SDLT returns. This may result in tenants having to pay additional SDLT or, in some cases, being able to reclaim overpaid SDLT.
Rent uncertain in the first five years
The tenants most directly affected by the fifth anniversary of SDLT are those who have entered into leases since 1 December 2003 where the rent payable under the lease was either:
- subject to a rent review within the first five years; and/or
- contingent, uncertain or unascertained in the first five years (for example, turnover leases).
When a lease is granted, a tenant is required to submit an SDLT return to HM Revenue & Customs (HMRC) and pay any SDLT due. The SDLT calculation is normally based on the rent payable in the first five years of the lease. Where, as in the circumstances mentioned above, the rent payable for the first five years is uncertain when the lease is granted, the tenant has to pay SDLT based on a reasonable estimate of the first five years' rent.
If the SDLT is calculated using estimated rent, a tenant is required to submit a second SDLT return to HMRC on the earlier of either:
- the rent payable for the first five years of the lease becoming known; or
- the end of the fifth year of the lease.
This second return, which is actually made in the form of a letter to HMRC, sets out the actual rent paid for the first five years of the lease and a self-assessment of the SDLT based on the revised figures. If the rent for the first five years remains unknown at the end of the fifth year, a second return is still required, but the SDLT will be calculated on a revised estimate of the rent for the first five years. The tenant will then have to submit a third return once the rent for the first five years finally becomes known.
When the second (or, where relevant, third) SDLT return is submitted, if the rent was previously under-estimated, the tenant will have to pay additional SDLT plus interest. No penalty will be imposed as long as the estimate was reasonable. If the rent was previously over-estimated, the tenant will be entitled to a refund of the overpaid SDLT plus interest.
Abnormal rent increases
In addition to the above, tenants should be aware that they may need to submit a further SDLT return if the rent increases substantially after the fifth year of a lease. Under anti-avoidance legislation, where a rent increase is regarded as "abnormal", a new lease is deemed to have been granted at a rent equal to the amount of the increase. Although the rules are complex, in broad terms rent increases are only regarded as "abnormal" if the rent has risen more than 20% per year since the last time rent was taken into account for SDLT purposes. In this situation, tenants are required to submit a further SDLT return and pay additional SDLT on the increased rent.
Representations have been made to HMRC regarding the practical difficulties which tenants face in complying with the current rules and filing requirements. In particular, HMRC have been in discussions with advisers, including Shepherd and Wedderburn, about the requirement to submit a second SDLT return at the end of the fifth year of the lease when the rent for the first five years is still uncertain, and also the confusion currently surrounding the rules on abnormal rent increases. As a result, HMRC are reviewing the legislation and it is likely that changes will be announced in Spring 2009. In the meantime, tenants are required to comply with the current statutory requirements and may face penalties should they fail to do so.
What should you do now?
Tenants who have entered leases since 1 December 2003 should consider whether the rent payable for the first five years of the lease was "uncertain" when the lease was granted. If so, they are required to submit a second SDLT return to HMRC when the rent for the first five years becomes certain (or, if it is still uncertain at the end of the fifth year, a second return at the end of the fifth year and then a third return when the rent subsequently becomes certain). Failure to submit these returns could result in penalties and interest being incurred.