HMRC SDLT: SDLTM14110 – Term of a lease: Backdated lease granted after holding over

Principles and Concepts of Backdated Lease

This page from the HMRC internal manual provides guidance on the term of a lease, specifically addressing scenarios where a backdated lease is granted after holding over. It outlines the implications and considerations for such leases.

  • Explains the concept of ‘holding over’ in lease agreements.
  • Discusses the legal and tax implications of backdated leases.
  • Provides guidance on how to handle these situations within HMRC regulations.
  • Offers examples and scenarios for better understanding.

Understanding SDLT for Backdated Leases After Holding Over

This article explains how Stamp Duty Land Tax (SDLT) applies to situations where a backdated lease is granted after a tenant continues to occupy a property after the original lease has expired. It outlines specific conditions and rules that affect how SDLT is calculated in such situations.

Key Conditions for SDLT Treatment

When applying SDLT in the context of a backdated lease granted after holding over, certain conditions must be met. These include:

  • The lease must be subject to SDLT, meaning it is not subject to the old stamp duty.
  • The tenant is still living in the property after the original lease’s end date.
  • A new lease of the same or similar property is granted to the tenant.
  • The new lease starts immediately after the original lease’s end date.
  • The new lease is granted on or after 19 July 2006.

If all these conditions are met, the rules regarding SDLT will apply differently than they usually would. Specifically, the new lease will be treated as starting from the date it is supposed to start, rather than the date it is actually granted.

Bradshaw v Pawley Principle

Typically, when a new lease is granted, the commencement date for SDLT purposes may differ. However, in this case, the usual principle from the case of Bradshaw v Pawley does not apply. Instead, we consider the stated start date of the new lease for SDLT calculations. This means:

  • The date where the new lease takes effect is important for SDLT purposes.
  • This allows the tenant to avoid potential SDLT charges that might be seen in other scenarios.

Rent During the Holding Over Period

In situations where there is a gap between the end of the original lease and the start of the new lease, rent may still be payable for that holding over period. However, under the current guidelines:

  • Any rent charged for this time between the end of the old lease and the start of the new lease can qualify for relief, similar to ‘overlap relief’.
  • Both leases must meet the conditions outlined earlier in order for this relief to apply.

This means that even though a new lease is being created and there’s a potential for double taxation, relief on the rent for that holding over period can often be claimed if all criteria are satisfied.

Non-Qualifying Leases

For leases that do not meet the criteria for SDLT relief, it’s unlikely that any double charge to SDLT will occur. This is because:

  • Generally, any rent paid during the holding over period is for use of the property under the original lease.
  • This means that the rent is technically not seen as consideration for a new lease, which could trigger SDLT in a different scenario.

However, in some cases, an increase in rent during the holding period could imply a change to the lease, which falls under specific SDLT regulations. The regulations would be stated under FA03/SCH17A/PARA13.

Examples to Illustrate the Concepts

Let’s examine some simple scenarios to clarify how these rules apply.

Example 1: A Qualifying Lease

Imagine a tenant whose original lease ended on 1st March 2023. The tenant continued to occupy the premises while negotiating a new lease. On 1st April 2023, a new lease is granted with a term that begins immediately on the original lease’s expiration. Here’s how it plays out:

  • The original lease ended on 1st March 2023.
  • The tenant was still in the property and was granted a new lease effective from 1st March 2023.
  • This situation meets all the key conditions required for SDLT purposes.
  • The tenant can claim overlap relief for the rent paid from 1st March 2023 to the date of the new lease since it qualifies for the conditions set out.

Example 2: Non-Qualifying Lease

Now, consider a tenant whose lease expired on 1st January 2023, and they continued to occupy the property without a new agreement until 1st February 2023. The rent during that holding over period increased. In this case:

  • The original lease expired, but the tenant remained in occupation.
  • A new lease was granted on 1st February 2023 with a significant rent increase.
  • As this does not follow the prescribed conditions, the tenant could face SDLT charges.
  • However, since the rent was merely for holding over, double taxation is still unlikely unless it fits the criteria under FA03/SCH17A/PARA13.

Final Considerations on SDLT and Backdated Leases

Understanding the application of SDLT for leases, especially those involving holding over, can get complex. But here are some final points to keep in mind:

  • Always be clear about when the original lease expires and when the new lease starts.
  • Check if the new lease qualifies under the rules for SDLT to avoid unexpected charges.
  • If in doubt, it’s advisable to consult with a tax professional or legal advisor who can provide tailored advice specific to your situation.

By following these guidelines and understanding how SDLT applies to backdated leases, tenants can navigate their responsibilities more effectively. Remember, clarity in lease terms and careful consideration of SDLT rules can lead to better management of any obligations tied to backdated leases after a holding over period.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM14110 – Term of a lease: Backdated lease granted after holding over

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Written by Land Tax Expert Nick Garner.
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