16 June, 2009
Stamp Duty Land Tax ("SDLT") on commercial property leases has never been easy! It is about to get much harder!
From December 2008, 5 years on from the introduction of SDLT, many commercial leases subject to the SDLT provisions will have been due rent reviews or will expire and these events may trigger an obligation by the tenant to file a further return and pay additional tax.
The following points apply to the current tenant and it is crucial that these issues are also fully investigated if you are taking an assignment of an existing lease.
Where a lease has an uncertain rent, for example one that is subject to review in the first five years that was not fixed, or a lease with rent dependent on the profits of a business, when the rent has been ascertained SDLT must be re-calculated and any shortfall paid by no later than 30 days following the 5th anniversary with interest from the date of the grant of the lease. Conversely, an overpayment will allow the tenant to claim a refund. If at the 5th anniversary the rent has still not been ascertained, for example in the case of turnover rent in which case the 5th year's turnover figures will not be known until the end of year 6, the tenant must make an SDLT calculation using reasonable estimates. At the end of year 6 a third calculation must be carried out. This means three separate returns for one lease.
The legislation prevents a tenant from trying to avoid SDLT by negotiating a low initial rent followed by a substantial increase after the 5th anniversary. Normal rent reviews due after the first five years are ignored in the initial calculation, but generally speaking anything over a 20% increase year on year is viewed as "abnormal". In that case SDLT will be payable on the whole of the increase, necessitating a further SDLT return.
Five year leases granted after 1 December 2003 may now be coming up for renewal. Assuming the tenant enjoys security of tenure he will continue to occupy the premises on a holding over basis under the Landlord and Tenant Act 1954. This situation can raise numerous SDLT issues. In particular, because the tenant is holding over, a one year lease is deemed to be granted under the Finance Act 2003 Schedule 17A paragraph 3 which means the tenant has to re-calculate the net present value ("NPV") of his lease for its extended term. This could mean an extra SDLT payment at 1% on the difference between the two NPV calculations or, if the deemed year's rent takes the NPV over the £150,000 threshold, an SDLT return would now have to be filed and tax paid. Failure to comply within 30 days of the commencement of the holding over period will trigger a penalty and interest.
It is important now for all tenants to review their leases, seek advice if appropriate and not bury their heads in the sand when it comes to SDLT. It should be borne in mind that the Revenue may be entitled to issue discovery assessments for up to 21 years. In some cases the tax position of a purchaser of land can remain open to attack by HMRC for 101 years and somebody is going to have to fund the recent bail outs and the Government borrowing!
For mroe details about Stamp Duty Land Tax on business properties, please contact Diana Robertson by email or any of the Commercial Property Solicitors at Forbes on freephone 0800 975 2463.