1 December 2008 is the fifth anniversary of the introduction of stamp duty land tax (SDLT). Happy Birthday SDLT! Why does it matter? Because the first leases which were subject to SDLT will now be approaching their fifth anniversary – that could be the occasion of further charges to SDLT (or a refund!).
Grant of lease
SDLT on a new lease is calculated on the net present value of the rent over the period of the lease. Where the lease is for more than five years, the rent taken into account is based on the rent payable in the first five years. Frequently, the rent payable in the first five years will not be known – perhaps there is to be a rent review after three years, or perhaps part of the rent is to be calculated by reference to turnover or underlying rents. In those cases you should make a reasonable estimate of the rents that will be payable for the first five years.
Fifth anniversary of lease
Where the SDLT was based on a reasonable estimate of the rents for the first five years, you must do a recalculation at the fifth anniversary (or earlier, if actual rents are known earlier). Calculate the SDLT on the basis of the actual rents and the rates of SDLT that applied at the time of the original grant. Compare the result with the original SDLT calculation:
- if the second calculation results in more SDLT, pay it within 30 days of the fifth anniversary – with interest from the date of grant of the lease;
- if the second calculation results in less SDLT, claim a refund of the excess – with interest from the date of grant of the lease.
If, at the fifth anniversary of the lease, the rents for the first five years are still unknown, calculate the SDLT using reasonable estimates again. Then, when the rents are eventually known, do a third calculation. This means it may be necessary to submit three separate returns for one lease! HMRC are reviewing this and may well simplify the procedure.
Abnormal rent increases
If there is an abnormal rent increase at any time after the fifth year of an SDLT lease, that is treated for SDLT as the grant of a new lease at a rent equal to the increase for the rest of the term. What is abnormal? The formula in the legislation is intended to catch any increase of more than 100 per cent over rent payable for each of the previous five years. However, it does not work as intended and there are lots of drafting problems. HMRC are planning new legislation to take effect from Budget 2009. Meanwhile they will consider large increases "on a case-by-case basis".
Remember that, if you take an assignment of a lease, you take on all the liability of the assignor, including:
- any adjustment of SDLT at the end of five years;
- SDLT on any future abnormal increase of rent.
The assignee of a lease should therefore try to get as much information as possible from the assignor about SDLT returns made and the basis for them.