HMRC SDLT: SDLTM13165 – Calculation of Stamp Duty Land Tax (SDLT): Rent: Variable or uncertain rent: Five-year rent reviews

Calculation of Stamp Duty Land Tax (SDLT): Rent

This section of the HMRC internal manual provides guidance on calculating Stamp Duty Land Tax (SDLT) for properties with variable or uncertain rent, specifically focusing on five-year rent reviews. It outlines the principles and concepts involved in assessing SDLT liabilities.

  • Explains the treatment of variable or uncertain rent in SDLT calculations.
  • Details the process for five-year rent reviews.
  • Provides examples to illustrate the calculation methods.
  • Offers guidance on compliance with HMRC regulations.

Understanding Stamp Duty Land Tax (SDLT) and Rent Reviews

This article explains how Stamp Duty Land Tax (SDLT) is calculated in relation to rent reviews, particularly focusing on situations where the rent amount is variable or uncertain. We’ll use simple language and examples to clarify key concepts.

What is SDLT?

Stamp Duty Land Tax (SDLT) is a tax you pay when you buy or lease a property in England, Wales, and Northern Ireland. When you enter into a lease, the tax is based on the total rent paid over the lease term, including any rent reviews. Rent reviews determine if the rent will change at specified times during the lease.

Understanding Rent Reviews

A rent review is a process where the amount of rent is reassessed. The lease agreement typically states when these reviews will happen and how rent will be adjusted. The first rent review is crucial, especially when it occurs very close to the end of a five-year period.

Key Points About Rent Reviews Affecting SDLT

According to section FA03/SCH17A/PARA7A of the law, there are specific rules that apply to the first rent review in the first five years of a lease. Here are the main points:

  • If it’s the first rent review during the 10-year lease.
  • If the rent amount is uncertain in advance (like market rent).
  • It takes place five years after a specific date, often the start date of the lease.
  • This specific date must fall within three months before the lease officially begins.

If a rent review meets all these criteria, it does not count for SDLT purposes. This means the rent from this review is ignored when calculating SDLT.

Example 1: A Lease with a Valid Rent Review

Consider a lease granted on 11 July 2015, for a term of 10 years starting on 25 June 2015 (which is within three months of when the lease was granted) at a rent of £35,000 each year. The lease includes a rent review to the open market value on the fifth anniversary of the start date.

For SDLT, the lease term starts on the date it was granted, which is 11 July 2015. The first rent review on 25 June 2020 is important because it occurs within the first five years of the lease. Normally, this would require figuring out the rent amount from that date to establish the rent for the next 5 years and to calculate the net present value (NPV).

However, since this rent review meets all the criteria of the law, it is considered to happen after the fifth year of the lease term. Therefore, the review does not impact the NPV calculation.

As a result, for the NPV calculation, the rent remains at £35,000 for the entire term, as this is the highest rent during the first five years.

Example 2: A Lease Outside the Conditions

Now let’s look at another lease granted on 26 September 2015. This lease term starts on the June quarter day (24 June) and includes a rent review to open market rent on the fifth anniversary of the start date.

In this case, since 24 June 2015 is more than three months before the lease was granted on 26 September 2015, the conditions of the law do not apply. Thus, this rent review must be considered when calculating SDLT.

Example 3: Linked Leases and Rent Reviews

Imagine you enter into an agreement for a lease on 1 January 2018, with a rent of £100,000 per year. This agreement states there will be a review to market rent on 1 January 2023. Because it is substantially performed on the same day, it is seen as a notional lease beginning on 1 January 2018, with its term aligned with the actual lease dates in the agreement.

When a lease is granted on 1 January 2020 according to this agreement, it links back to the notional lease. If there are any additional SDLT payments required, they will be the responsibility of the actual leaseholder. If the leaseholder of the actual lease is different from the notional lease, they will be responsible for paying any extra SDLT owed.

Regarding the rent review in this case, it happens on 1 January 2023. Since this review is only three years after the lease was re-granted, it does not meet the necessary conditions outlined in the law for SDLT purposes.

Final Thoughts on SDLT Calculations

The correct application of the SDLT rules regarding rent reviews is essential for landlords and tenants. Knowing how different lease agreements and rent review clauses might affect your SDLT liability can prevent unintentional errors during property transactions.

For further information on SDLT processes or specific cases like SDLTM0000, you can visit official guidance resources.

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Written by Land Tax Expert Nick Garner.
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