Following recent changes in the rules on Stamp Duty Land Tax (“SDLT”), it is useful to remind ourselves of some basic principles of the tax. In this blog we look at SDLT rules relating to agreements for lease, and notional leases.
SDLT may be payable before a lease is granted if an agreement for lease is “substantially performed”. An agreement for lease is substantially performed when:
1. The tenant pays any rent – this is likely to include an amount expressed to be a licence fee but that is referable to the rent payable under the lease once granted; or
2. The tenant pays or provides the whole or a substantial proportion of the whole of the non-rental consideration. A substantial proportion is usually interpreted as 90% or more although it is not defined in legislation; or
3. The tenant (or a person connected with the tenant) takes possession of the whole or substantially the whole of the land; or
4. The tenant obtains access to the property and takes possession of it. Any occupation of the property may trigger this, though it is a question of degree. Access only at specified times, onto a limited part of the land, or for a limited purpose (for example to carry out contamination checks) will probably not trigger it. Occupation by a connected person or an agent will be sufficient, as will occupation by a third part on the tenant’s behalf, such as a builder carrying out the tenant’s fit-out works.
When an agreement for lease is substantially performed, a notional lease is deemed to have been granted. A notional lease and an actual lease are treated as a single lease, which begins on the date of substantial performance (the “effective date”) and ends at the contractual end of the lease.
If the end date and rent for the first five years are known, the procedure is the same as for any other lease grant, and no further return or payment will be needed at actual lease grant. However, if the end date of the actual lease is not yet known, the notional lease must be treated as a lease for an indefinite term, although HMRC would accept an estimate of the lease end date to be made, with a further payment/return as required when the lease is granted. Similarly, if the rent for the first five years is unknown when substantial performance takes place, the notional lease will be treated as having an uncertain rent, with a further payment/return as required when the lease is granted.
Any SDLT due must be paid and a land transaction return must be submitted to HMRC within 30 days of the effective date. Any further payment or return must be submitted to HMRC within 30 days of completion of the lease, although the Government proposes reducing the time to submit to 14 days from 2017-2018. In the event of overpayment following the first return, the Tenant should submit a second return and write to the Birmingham Stamp Office for a refund.
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