HMRC SDLT: Reverse Premiums in Leases: SDLT Changes for Scottish Land Transactions

SDLTM18048 – Chargeable Consideration: ‘Premium’ Payments for Lease: Reverse Premiums

This page discusses the concept of chargeable consideration in relation to ‘premium’ payments for leases, specifically focusing on reverse premiums. It notes that from April 2015, Stamp Duty Land Tax (SDLT) no longer applies to land transactions in Scotland, which are now subject to the Land and Buildings Transaction Tax.

• Explains chargeable consideration for leases.
• Focuses on ‘premium’ payments and reverse premiums.
• Notes the change in tax application in Scotland from April 2015.
• Land transactions in Scotland now fall under the Land and Buildings Transaction Tax.

“`

Understanding Premium Payments for Leases: Reverse Premiums

This article focuses on how premium payments are treated in relation to leases, specifically when it comes to reverse premiums. A reverse premium refers to a situation where the landlord pays the tenant to take on a lease. This can often happen to encourage someone to move into a property, especially in a competitive market.

What is Chargeable Consideration?

Chargeable consideration is the total amount paid for a lease, including any premiums involved. For lease transactions, this includes:

• Any money paid directly when signing the lease.
• Any ongoing payments or rent specified in the lease.
• The value of any benefits received by the tenant, such as financial incentives.

Essentially, chargeable consideration is the price paid by the tenant for getting the lease, which can include various elements beyond just the rent itself.

What are Premium Payments?

Premium payments are amounts paid by the tenant to the landlord apart from the regular rent. These payments can occur in different situations:

• When a new lease is granted.
• When there’s a transfer of an existing lease.

Premium payments are considered part of the consideration when calculating the Stamp Duty Land Tax (SDLT). This means they must be reported to HM Revenue and Customs (HMRC) when completing a land transaction.

Understanding Reverse Premiums

A reverse premium is specifically when the landlord pays the tenant instead of the other way around. The payment may occur for several reasons:

• The property may be difficult to rent out, so the landlord offers the payment to attract tenants.
• The landlord wants to secure a long-term tenant and is willing to pay them to take on the lease.
• The payment might be a way for a landlord to offload a property that requires improvements or has less desirable features.

How does SDLT Treat Reverse Premiums?

It’s important to know that reverse premiums can affect how SDLT is applied. When calculating SDLT, reverse premiums are treated as a part of the overall consideration. Here’s how:

• The value of the reverse premium is added to any other payments the tenant is making, such as rent.
• This combined amount becomes the chargeable consideration for SDLT purposes.

As a result, if a tenant receives a payment from the landlord for taking on a lease, the total consideration for SDLT will include that reverse premium. This means a tenant needs to be aware of such payments, as they impact tax liabilities.

Example Scenario: Reverse Premiums in Action

Consider the following example to illustrate how reverse premiums work in practice:

• A landlord has a commercial property that has been on the market for several months without attracting a tenant.
• To entice a business to occupy the space, the landlord offers a reverse premium of £10,000 to the tenant.
• The tenant agrees to a five-year lease with an annual rent of £20,000.

In this case, the total chargeable consideration for SDLT would be calculated as follows:

• Annual rent over five years: £20,000 x 5 = £100,000
• Plus reverse premium: £10,000
• Total chargeable consideration: £100,000 + £10,000 = £110,000

Here, the tenant needs to report the total of £110,000 when calculating SDLT liability.

SDLT Return Obligations for Reverse Premium Payments

When a reverse premium is involved, it is essential to ensure that the SDLT return includes accurate figures. The SDLT return must be filed within 14 days of the completion of the transaction. Failure to report correctly can lead to penalties. To comply with these obligations, consider the following:

• Ensure you calculate the chargeable consideration accurately by including both rent and reverse premium.
• File the SDLT return within the specified timeframe to avoid any late fees.
• Keep a record of all calculations and relevant agreements in case HMRC asks for clarification.

When is SDLT Not Applicable?

It’s worth mentioning that SDLT does not apply to land transactions in Scotland. Instead, these transactions are governed by the Land and Buildings Transaction Tax (LBTT). Following the reforms in April 2015, Scottish property transactions must be treated under the LBTT regulations, not SDLT rules.

Key Considerations for Tenants and Landlords

Both landlords and tenants should be aware of what reverse premiums involve and how they impact financial responsibilities. Here are some considerations for each party:

For Tenants:

• Make sure to fully understand any financial arrangements involving reverse premiums.
• Consult with financial advisors to gauge the impact of these payments on overall lease costs.
• Disclose all reverse premium amounts correctly in the SDLT return.

For Landlords:

• Consider the financial implications of offering a reverse premium when seeking tenants.
• Clearly state the terms of the reverse premium within the lease agreement.
• Understand the potential SDLT liability associated with the premium when determining overall property costs.

Conclusion

In summary, while this article does not conclude, the key takeaway is understanding how reverse premiums impact SDLT calculations is vital for anyone involved in property leases. Each party in the transaction should remain informed about financial responsibilities and compliance obligations to avoid issues with HMRC.

For more detailed guidance on SDLT and reverse premiums, visit SDLTM18048 – Chargeable Consideration: ‘Premium’ payments for lease: Reverse premiums.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: Reverse Premiums in Leases: SDLT Changes for Scottish Land Transactions

View all HMRC SDLT Guidance Pages Here