Once the lease itself is concluded, the consequences of SDLT depend on what has happened before. In the wake of recent changes to stamp duty rules (“LTDS”), it is a good idea to remind ourselves of some of the fundamental principles of the tax. In this blog, we look at SDLT rules regarding leases and fictitious leases. For more information on this or other real estate, please contact Ian Gilmour – a partner or member of Edwin Coe`s real estate team. In the second of a two-part series on stamp tax (SDLT), Bill Chandler wants to clarify the DESLT treatment of leases awarded on the basis of a lease agreement. Where a lease is essentially executed, paragraph 12A considers that a fictitious lease has been granted for a substantial period of time for a period beginning on that date and expiring at the end of the actual lease. However, in many cases, the end date of the fictitious lease will not be known with a significant return. This will be the case if the tenant takes access to the equipment before the practical completion, but the duration of the tenancy is calculated by referring to the practical completion date. If the duration is not known, the fictitious lease is considered an indeterminate lease and, initially, considered a one-year lease. Unless the rent (including VAT) does not exceed USD 150,000, no LTDS is due at this stage and no return is required. However, the SDLT position of the fictitious lease must be reviewed: the SDLT liability is triggered on the “effective day” of the land transaction. SDLT must be paid within 14 days of that date to avoid interest and penalties.
As a general rule, the effective date is either the date the contract is entered into, or in the event of a significant performance of a contract or lease, if it is earlier. For transactions with an effective date prior to March 1, 2019, a 30-day period applies. In essence, if the term of the tenancy agreement exceeds five years, UNDP is calculated on the basis of the actual rent payable for each of the first five years of the tenancy agreement and, for the remainder of the period, the rent is considered the highest rent to be paid for an uninterrupted period of 12 months during the first five years of the tenancy agreement. This first calculation does not take into account any increases or reductions in rents after the first five years of maturity, whether in the tenancy agreement or otherwise. If the leases are linked but do not follow each other – z.B. if the same landlord grants the leases to the same tenant – the NPV of each lease is aggregated for the purposes of applying the thresholds. Stamp duty (SDLT) is sometimes due by tenants on rental contracts. The LTDS payable is based on the value of the lease calculated on the basis of the premium paid, the rent to be paid and the duration of the tenancy agreement. SDLT is more likely to be payable with medium- and long-term leases or for higher rents. Despite the frequency with which leases are concluded, their SDLT treatment remains a mystery to many practitioners. Outdated errors and instructions in HMRC`s Stamp Duty Land Tax online manual don`t help.
However, an analysis of the underlying legislation contained in the 2003 Finance Act (particularly Schedule 17A and Section 81A) provides a much simpler explanation. SDLT may be payable prior to the award of a lease if a lease is “essentially executed”. A lease agreement is essentially executed if: if you consent to an extension of the term or extent of the land included in your lease, the extension will be treated as a rebate and an additional subsidy, and SDLT may be payable on the value of the lease recovered. In addition to accelerating the maturity date of SDLT, the inclusion of the period between the completion of the profession and the lease generally means that the fictitious lease is longer than the lease itself.