HMRC SDLT: SDLTM17075 – Miscellaneous Provisions: Grant of a reversionary lease: Example

Principles and Concepts of Granting a Reversionary Lease

This section of the HMRC internal manual provides guidance on the grant of a reversionary lease. It covers the following key principles and concepts:

• Definition and explanation of a reversionary lease.
• Legal implications and requirements for granting such leases.
• Example scenarios illustrating the application of these provisions.
• Relevant tax considerations under UK law.
• Procedures for compliance with HMRC regulations.

Understanding SDLT on Grant of a Reversionary Lease

What is a Reversionary Lease?

A reversionary lease is an agreement where a new lease is given for a property that will start at a future date after an existing lease ends. This can occur when a property owner wants to secure future rental income before the current tenant’s lease expires.

Key Terms

– Grantor: The person or entity providing the lease.
– Grantee: The person or entity receiving the lease.
– Premium: An upfront payment that may be made for the lease.
– Consideration: Any payment made for the lease, which can include both a premium and rents.

When is SDLT Payable?

Stamp Duty Land Tax (SDLT) is charged on properties in England and Northern Ireland. It becomes relevant when a reversionary lease is granted and the premiums or rents exceed specific thresholds. The calculation of SDLT depends on the duration of the lease and the amount of the associated costs.

How is SDLT Calculated for a Reversionary Lease?

SDLT is calculated based on the total consideration involved in the transaction. These considerations can include:

– Any premium for the lease.
– Annual rent capabilities.

The SDLT rates are tiered and apply progressively to different portions of the total consideration. If the total amount exceeds the threshold, the SDLT calculations can look like this:

– For the first £125,000: 0%
– For the next £125,000: 2%
– For the next £675,000: 5%
– For amounts above £925,000: 10%
– Additional rates may apply for properties that are considered higher-value residential properties.

For example, if a grantee is given a reversionary lease with a premium of £300,000 and an annual rent of £40,000, SDLT will apply to both the premium and the net present value (NPV) of the rent, as demonstrated in the section below.

Calculating SDLT for Premiums

To determine SDLT for the premium, the incremental amounts are applied against the current thresholds.

1. Consider a premium of £300,000. The calculation would be as follows:

– The first £125,000 is taxed at 0%: £0
– The next £125,000 is taxed at 2%: £2,500
– The remaining £50,000 is taxed at 5%: £2,500
– Total SDLT on the premium: £0 + £2,500 + £2,500 = £5,000

Calculating SDLT for Rent

For leases, there is also a need to calculate the NPV of the rent. This involves determining the present value of the annual rent for the duration of the lease along with the associated discount rate.

1. Say the annual rent is £40,000, and the lease lasts for 20 years. The NPV would typically be calculated using a formula, but for simplicity:
– The discount rate used is generally taken as 3.5%.
– The NPV of the rent would be calculated using financial models.

2. Let’s assume the NPV of £40,000 per year for 20 years works out, hypothetically, to be £800,000.

3. The SDLT would then need to be calculated on the NPV amount:
– The first £125,000 is taxed at 0%: £0
– The next £125,000 is taxed at 2%: £2,500
– The next £675,000 is taxed at 5%: £33,750
– The remaining £70,000 is taxed at 10%: £7,000
– Total SDLT on the rent: £0 + £2,500 + £33,750 + £7,000 = £43,250

4. The total SDLT due on both the premium and the rent NPV would thus be £5,000 (from the premium) + £43,250 (from the rent) = £48,250.

Reporting and Paying SDLT

When a grant of a reversionary lease occurs, it is essential to report and pay SDLT properly. The following steps outline how to do this:

– Complete the SDLT return online through HMRC’s portal.
– The return should include details of the lease, the premium, and the calculated SDLT.
– Payment of the SDLT should be made no later than 14 days after the effective date of the lease.

It’s important to ensure that the property’s value and lease terms are accurately reported to avoid penalties.

Examples to Illustrate SDLT on Reversionary Leases

Let’s look at some detailed examples to clarify how SDLT is applied.

Example 1: A straightforward reversionary lease

– Mr. Smith owns a shop property. He grants a reversionary lease to Mr. Jones, with a premium of £200,000.
– There is no annual rent agreed upon.

Calculating SDLT:
– For £200,000:
– The first £125,000 is taxed at 0%: £0
– The next £75,000 is taxed at 2%: £1,500
– Total SDLT is £1,500.

Example 2: A reversionary lease with considerable rent

– Ms. Brown grants a reversionary lease with a premium of £100,000 and an annual rent of £50,000 for 15 years.

Calculating SDLT:
– Premium of £100,000:
– The first £100,000 is taxed at 0%: £0

– For the annual rent:
– Calculate NPV as follows, assuming a 3.5% discount:
– The NPV for 15 years of £50,000 would come out to approximately £650,000.

Calculating SDLT for the rent:
– For £650,000:
– The first £125,000 is taxed at 0%: £0
– The next £125,000 is taxed at 2%: £2,500
– The next £675,000 must be applied:
– Total SDLT for Rent = £0 + £2,500 + £33,750 = £36,250.

– Adding these gives a total SDLT payable of: £0 (premium) + £36,250 (rent) = £36,250.

Important Considerations

When dealing with reversionary leases, it is important to remember:

– Ensure accurate information on the duration and terms of the lease.
– Keep all documents related to the grant accessible, as HMRC may request these.

Be aware that incorrect or incomplete information could lead to penalties imposed by HMRC. Always consider consulting with a qualified professional for larger transactions involving reversionary leases.

Where to Get More Information

If you want to explore more about SDLT and reversionary leases, you can visit the HMRC SDLT guidelines directly [here](https://stampdutyadvicebureau.co.uk/hmrc/SDLTM0000). This resource provides a detailed overview of SDLT rules and procedures related to property leases.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM17075 – Miscellaneous Provisions: Grant of a reversionary lease: Example

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