The Finance Act 2013 implemented important changes to the treatment of leases for the purposes of stamp duty land tax (SDLT). The act amends or abolishes certain key provisions of Schedule 17A to the Finance Act 2003. In accordance with the Government’s stated aim of simplifying the tax system in general, the changes are intended to reduce the administrative burden and reporting requirements in three areas.
Under the old rules, where an agreement for lease was substantially performed before a lease had been granted, e.g. by the tenant going into possession, that agreement was treated as a notional lease commencing on the date of substantial performance. In many instances, e.g. where the lease was for a term of seven years or more with a premium of over £40,000 and an annual rent greater than £1,000, a return had to be submitted and any SDLT paid within 30 days of substantial performance. The grant of the actual lease was treated as a completely separate transaction and the notional lease was deemed to have been surrendered. Accordingly, a second return had to be submitted and any SDLT paid, with relief available for the overlap between the notional and the actual leases.
The changes mean that the notional and actual leases are now treated as a single lease granted on the date the agreement for lease was substantially performed and ending at the end of the term of the actual lease. SDLT is payable on the consideration for the new single lease, i.e. the total rent over the term plus any other consideration. Although two SDLT payments will have to be made (after substantial performance and the actual grant, respectively), the calculation for relief between those payments is much more straightforward than before.
The Finance Act 2003 specifies that leases which continue after the expiry of a fixed term are treated as having been extended for a period of a year and, after that, for two years and so on. Prior to the introduction of the Finance Act 2013, if any SDLT was due in respect of the extended lease, a return had to be submitted and any tax paid i.e. for the full 12 months within 30 days of the first day of the extension.
The new rules provide that, where a lease is, as above, treated as having been extended, notification to HMRC of any additional tax due need not be given until the end of the year, being 30 days after the period of extension. If the extended lease is not renewed, the final return only needs to be made to the end of the lease and not for the full 12 month extension.
If the extended lease is subsequently renewed, the ‘growing lease’ rule described above will cease to apply and the renewal lease will be deemed to have begun immediately after the date of expiry of the old lease (or the start of the 12 month period in which it was renewed). Accordingly, any rent payable under the extended lease will be treated as payable under the renewal lease and the tenant will only have to submit one return to HMRC.
However, if, as most commercial leases are, an extended lease is renewed and backdated to the expiry of the contractual term of the old lease, two returns will still be required to be made, one for the old lease which was extended and one for the renewal lease. In any event, overlap relief should apply such that SDLT will not be due on the rent under the renewal lease that has already been taxed under the old lease.
Broadly, paragraphs 14 and 15 of the Finance Act 2003 levied an additional charge to SDLT where rent doubled, or more than doubled, after the first five years of a lease. HMRC had to be notified every time such an increase was made.
The Finance Act 2013 abolishes those provisions. Consequently, tenants are no longer subject to the administrative burden of assessing whether rent increases are ‘abnormal’ and engaging in the complex calculation of their additional SDLT liabilities.
HMRC estimates that around 22,000 businesses each year will benefit from the changes with reductions in their administrative costs and reporting requirements. Although the short term savings appear negligible, the reduction and simplification of tenants’ obligations is to be welcomed.
If you require advice on the issues discussed in this article, please contact Paul Paling, partner and head of the London Commercial Real Estate Team at email@example.com