On 1 December 2008 stamp duty land tax ("SDLT") is five years old. This anniversary brings with it potentially greater reporting burdens and additional tax payments for tenants.
The purpose of this update is to provide you with an overview of the position and how it may affect you.
To what does it apply?
It can apply to all leases which were entered into after 1 December 2003 where, any time after five years from their start date, the rent is increased. It matters not whether the rent is increased by a review clause already in the lease or a variation outside the terms of the lease.
Why does it apply?
At the outset of the lease, SDLT is calculated using the rent payable in the first five years. HMRC were concerned that SDLT could be avoided by people deferring rent obligations until after the fifth year. These provisions are intended to catch this. Unfortunately, they can also catch genuine commercial situations where the rent has increased through no avoidance reason.
How does it work?
When the rent increases after the fifth year, it will be necessary to test it against the previous rent to establish whether or not there is an "abnormal increase".
As of Thursday 30 October 2008 HMRC have indicated that they wish to consult, amongst other things, upon the formula to be used to calculate an abnormal increase.
The existing formula is complicated and acknowledged by the Revenue to be too wide and to catch leases that should not be caught. As a result it is proposed that an increase will not be abnormal provided it is less than the higher of:
HMRC are also considering the possibility of requiring a return only every five years rather than on each occasion of an abnormal increase.
When will this apply?
HMRC have indicated they will be unable to introduce any changes to the existing rules before Budget 2009. As a result, the existing formula will apply in the interim. HMRC have however indicated that they will look "sympathetically" upon any case which has caused a disproportionate or burdensome impact.
The five-year "look back"
Aside from abnormal rent increases, it should not be forgotten that where the rent during the first five years was, at the outset, uncertain, unascertained or contingent then there may be an obligation to file an additional return and pay more duty on the earlier of (a) the rent becoming certain and (b) the fifth anniversary of the lease. These rules are unlikely to be affected by the abnormal rent increase changes.
It is essential, therefore, when a rent review occurs during the first five years or, where the rent has remained variable throughout that period e.g. a turnover lease, when the fifth anniversary arrives, a review of the SDLT position takes place.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.