Read the original guidance here:
HMRC SDLT: SDLTM13225 – Calculation of stamp duty: Rent: Variable or uncertain rent: Example 6

Understanding Stamp Duty Calculations for Variable Rent

This article explains how to calculate stamp duty for leases where the rent is uncertain. We will go through a detailed example to clarify the process.

Example of a Lease with Variable Rent

Let’s consider a lease that starts on 1 April 2018, lasting for seven years. The rent agreed upon is 10% of the company’s turnover. The projected earnings provided in the business plan outline the following rental estimates for each of the seven years:

• Year 1: £22,500
• Year 2: £22,500
• Year 3: £23,000
• Year 4: £25,000
• Year 5: £27,000
• Year 6: £30,000
• Year 7: £31,000

Calculating Net Present Value (NPV)

Since the rent changes based on turnover, we need to calculate the Net Present Value (NPV) for the first five years using the estimated rental figures. The NPV for the last two years (years 6 and 7) will be based on the highest rent estimated during the first five years.

The rent values for the NPV calculation will therefore look as follows:

• Year 1: £22,500
• Year 2: £22,500
• Year 3: £23,000
• Year 4: £25,000
• Year 5: £27,000
• Year 6: £27,000
• Year 7: £27,000

From these figures, the calculated NPV amounts to £151,193.

Reviewing Rents After Five Years

It’s important to reassess uncertain rents at the end of the fifth year of the lease. Even if the rent is still not fully determined, you should use the actual rents you know and update your estimates for the remaining years. For the later years, you should always use the highest rent from either actual or estimated figures from the previous years.

In our example, by 31 March 2023, the actual turnover for year 5 was still unknown, but we had the accounts ready for years 1 to 4. Therefore, a revised estimate for the total rent over the seven years would include:

• Year 1 (Actual): £23,035
• Year 2 (Actual): £21,252
• Year 3 (Actual): £24,077
• Year 4 (Actual): £27,045
• Year 5 (Estimate): £25,000
• Year 6 (Highest): £27,045
• Year 7 (Highest): £27,045

As this new estimate surpasses the original figure provided in your return, you must submit an additional return by 30 April 2023. This return is necessary to ensure that you inform the Stamp Taxes office of the updated amounts accurately.

Revising Returns Based on Actual Rents

Once you have received the actual rents for all five initial years, it is essential to update your return to reflect these actual figures. You will also need to pay any extra tax due to prevent penalties.

For our example, if you find out the rent for year 5 only by 1 September 2023, the following steps must be taken:

• By 1 May 2023: Report the revised NPV of £151,686 to the Stamp Office through a letter.
• By 1 October 2023: Recalculate the NPV based on the actual rent of £28,673 for year 5. The updated NPV would be £157,383, and you should inform the Stamp Office by letter.

Key Points to Remember

• Annual rent calculations based on turnover can lead to varying amounts, so it is essential to understand how to calculate NPV correctly.
• Reassess rent at the end of the fifth year, even if you haven’t received complete data.
• Use actual rents where available and the highest estimates for years not fully determined yet.
• Always communicate updated figures to the Stamp Office by the required deadlines to avoid penalties.

Additional Information

This guidance on calculating stamp duty for variable or uncertain rents is critical for landlords and tenants to comprehend. It helps ensure compliance and accurate tax reporting, reducing the risk of incurring fines or additional tax liabilities unexpectedly.

For further information, you can refer to the official guidance on variable rent calculations or consult with a tax professional who can help clarify any specific situations related to your lease or property agreements.