Read the original guidance here:
HMRC SDLT: SDLTM17010 – Miscellaneous Provisions: Substantial performance of an agreement

Understanding Substantial Performance of an Agreement for Lease

An agreement for lease does not incur stamp duty land tax (SDLT) unless it has been significantly acted upon before the actual lease is issued. To get clarity on what constitutes substantial performance, you can refer to SDLTM07850 to SDLTM07950.

The Role of Substantial Performance

According to FA03/SCH17A/PARA12A, if an agreement for lease is significantly performed before the lease is officially signed, it is treated as if a notional lease has been granted. The important points to note include:

– Effective Date: The start date is when the substantial performance occurs.
– Term Length: The duration of this notional lease runs from the effective date until the date defined in the agreement. If it’s unclear when this period ends—such as when it’s based on the readiness of a building—the notional lease is seen as having an indefinite term (refer to SDLTM14050).
– Tax Responsibilities: If a notional lease comes into effect, you may need to submit a land transaction return and pay any resulting tax within 30 days from the effective date (see SDLTM00310).

Granting the Actual Lease

The way tax applies when the lease is granted depends on whether it was issued before or after a certain date.

Leases Granted on or After 17 July 2013

If the lease is granted on or after 17 July 2013:

– The notional lease and the actual lease are combined and treated as a single lease.
– The date of this single lease is when the substantial performance took place.
– The term lasts from this date to the end date of the actual lease.
– The total consideration for this lease includes the overall rent and any other relevant financial contributions related to both the notional and actual leases (paragraph 12A(3), Schedule 17A).
– These leases are considered linked transactions. If this linkage means extra tax is payable, you must submit a return for the notional lease or an additional return for the actual lease. However, if no additional taxes are due, the granting of the actual lease does not require notification.

Leases Granted Before 17 July 2013

For leases granted before 17 July 2013:

– The situation is viewed as having released (or surrendered) the notional lease and subsequently re-granted it.
– You would have been eligible for relief on the rent for the period of overlap (FA03/SCH17A/PARA9; see SDLTM16010).
– If any additional tax was due, a further return would be necessary. The linked transactions provisions outlined in FA03/SCH5, which pertain to a single scheme or arrangement, would likely apply in this situation.

Important Points to Remember about Notional Leases

When dealing with notional leases, consider the following:

– Identification of End Date: If it’s unclear when the notional lease ends, it is treated as indefinite. This can happen if the lease duration is connected to a condition, like a property becoming ready for occupancy.
– Filing Requirements: Always be aware of the 30-day deadline for submitting any necessary tax returns following the effective date of a notional lease.
– Surrender and Re-grant Process: Understand that surrendering a lease prior to re-granting can still involve tax considerations, especially if connected to previous agreements.

Linked and Non-Linked Transactions

– Linked Transactions: Transactions are classified as linked when they impact the consideration or tax due. If the notional lease and actual lease relate, they typically qualify for linked treatment.
– Non-Linked Transactions: If there’s no additional tax implication, the granting of the actual lease alone may not require a return.

Examples to Illustrate the Concepts

– Example 1: Consider a situation where a company signs an agreement to lease office space and starts renovations on the property before the formal lease is signed. If the renovation work is seen as substantial performance of the lease agreement, the company must submit a land transaction return and pay SDLT by the effective date established.

– Example 2: A firm leases a warehouse under terms where the rental period starts once the building is certified fit for use. If the warehouse is certified ready for occupancy after the agreement is signed, and this is not defined with a specific end date, the notional lease will be regarded as having no specified end.

When dealing with transactions related to agreements for lease, a thorough understanding of the implications surrounding substantial performance, treatment of notional leases, and tax obligations is essential to remain compliant with HMRC regulations. Understanding these details helps manage both tax liabilities and administrative duties effectively.