Revisiting Stamp Duty Land Tax and leases

Updated December 2011

Stamp Duty Land Tax (SDLT) replaced Stamp Duty on 1 December 2003. The old Stamp Duty regime was very different in character. One feature of SDLT is a requirement for continued compliance during the term of the lease and not only at the point of completion of a lease. Therefore its is important for tenants to remind themselves of the legal requirements that they must fulfil as failure to do so can result in the speedy application of penalties and interest by HMRC.

Unlike the stamp duty charge that preceded it, SDLT is not a "one-off" tax payable on completion of the document. SDLT is a tax on a transaction and although in most cases only one payment and one SDLT return is required for a lease sometimes further payments and returns are required during the term and/or any period of holding over. It is the responsibility of the tenant in situ (not necessarily the tenant who entered in to the lease) to ensure action is taken to avoid payment of penalties and interest.

Rent reviews and increases

Generally where the amount of rent payable for the first five years of the term is certain, SDLT is calculated at completion of the lease and there will be no further sums due.

Where rent is to be reviewed during the first five years of the term, or if the rent is otherwise variable, uncertain or contingent during that time further action is required.The tenant must make a reasonable estimate of the rent payable for each of the first five years of the term and pay SDLT based on that figure. The tenant must assume that any contingency will occur when making its calculation.

These rules apply to all types of review, increase, variation or contingency in rent provided for by the lease. They cover regular open market reviews as well as, for example, turnover rents, or geared rents. The rules do not generally apply to rents linked to the retail prices index.

Once the rent for the first five years becomes certain the tax must be recalculated using the actual rent figures. If as a result a return must be submitted (where one was not previously) or more SDLT is due, a further return has to be made and the additional tax paid with interest.

If at the end of the fifth year of the term the rent is still uncertain (e.g. if the results of a rent review are still unknown), a return is still required on an estimated basis and a further return (the third one for the lease in question) will be required when the result of the review is known.

Variations in rent after the first five years and abnormal rent increases

Variations in rent after the first five years of the term are not generally taken into account for SDLT purposes. However, there is an anti-avoidance rule that if, following the end of the fifth year of the term, the amount of rent payable increases (or is increased), and the increase is regarded as "abnormal" further SDLT will be due. As a general rule of thumb, an increase is abnormal if the rent has doubled (or more) after five years (i.e. it goes up more than 20% per annum).

Variations to leases

A variation of a lease may alter the amount of SDLT due, this includes:

• an increase in rent not contemplated by the original terms of the lease during the first five years;
• a decrease in rent during that time;
• an increase in the length of the term; or
• an increase in the extent of the demise

Any of the above must be notified to HMRC and may attract an SDLT charge.

Holding over and lease renewals

Many business tenants have a statutory right to renew their leases at the end of the contractual term. "Holding over" is a reference to the period that a business tenant remains in occupation during negotiation of the new lease after the contractual term has ended.

There are generally no SDLT implications when holding over pursuant to a lease granted before 1 December 2003 and which would have been subject to stamp duty.

For leases granted after 1 December 2003 and subject to SDLT, the holding-over period counts as an extension of the original lease. It is necessary for the tenant to recalculate the tax at the beginning of every year of holding over taking into account each extra year. If further SDLT is due or SDLT becomes due where none was due before, the tenant must submit a return and pay the additional SDLT at the rate applicable as at the date of extension of the lease.

Interest and penalties

Where a return or further return is required and/or additional SDLT is payable, they are due within 30 days of the date the new rent first becomes payable or the period of holding over commences, so a tenant must act quickly.

There is an automatic flat-rate penalty of £100 for late submission of a land transaction return, rising to £200 if the return is more than three months late. If a return is more than 12 months late, there is a penalty of up to the amount of tax due in addition to the penalty of £200. Interest on any unpaid SDLT is due from the end of the 30 day period until the date of payment. 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at December 2011. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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