Read the original guidance here:
HMRC SDLT: SDLTM14065 – Term of a lease: Leases treated as continuing after a fixed term: Example 1

Understanding Lease Extensions and SDLT Calculations

This article explains how lease extensions affect Stamp Duty Land Tax (SDLT) calculations, particularly for non-residential leases. The example used illustrates these principles in a straightforward manner.

Key Terms Explained

Before diving into the example, let’s clarify some important terms:

• Lease: A legal agreement where one party (the tenant) pays rent to another party (the landlord) for the use of property.
• Landlord and Tenant Act 1954: UK legislation that provides security of tenure for commercial tenants, meaning they have the right to stay in their premises after the lease ends until a new lease is agreed or they choose to leave.
• Net Present Value (NPV): A calculation that determines the current worth of future rental payments, taking into account factors like interest rates.
• Stamp Duty Land Tax (SDLT): A tax paid on the purchase price or value of certain transactions involving land or property in the UK.

The Example Scenario

Let’s look at a detailed example of a lease that illustrates how SDLT is assessed when a lease continues beyond its initial term.

• The lease in question is a non-residential lease that originally lasted for 10 years.
• The lease started on 25 March 2005 and was previously notified to HMRC on 20 April 2005.
• The annual rent throughout the lease was fixed at £60,000.
• The lease officially ended its initial term on 24 March 2015.
• The tenant continued to occupy the premises as they were negotiating a new lease with the landlord.

Initial SDLT Payment

When the lease was first granted, the NPV of the rent was calculated as £498,996. Based on this calculation, the SDLT owed at that time was £3,489, which was paid when the lease was created.

After the Initial Term Ends

On 25 March 2015, which is the day after the original term ended, the lease is automatically treated as being extended. At this point, the lease is considered to last for an additional year, making it an 11-year lease overall. The NPV for this new assessment is recalculated:

• New NPV: £540,093 for an 11-year lease.
• New SDLT due: £3,900.
• Since £3,489 had already been paid at the lease’s start, the additional SDLT due is: £3,900 – £3,489 = £411.

This additional charge must be communicated to HMRC in a letter, including details of the previous payments and the new SDLT calculations. The deadline for this notification is 23 April 2016, which is 30 days after the end of the first year of holding over.

Further Extension of the Lease

If negotiations for a new lease are not completed by 24 March 2016, and the tenant continues to occupy the property, the lease will again be treated as extended. This time, it is treated as lasting for a total of 12 years from the original start date of 25 March 2005. The NPV is recalculated once more:

• New NPV for the 12-year lease: £579,800.
• New SDLT due: £4,298.
• Previous payments amounted to £3,900 (including the original SDLT and the additional SDLT paid in April 2016). Therefore, the net additional SDLT owed is: £4,298 – £3,900 = £398.

This additional amount also needs to be reported to HMRC. A letter must include details about all previous payments and the new SDLT calculations, and this must be submitted by 23 April 2017—30 days after the end of the second year of holding over.

What If the Tenant Vacates?

If the tenant decides to vacate the premises before the new lease is agreed and does not want to continue occupying, the situation changes. The previous SDLT obligations will still need to be met, but the tenant will not have to incur additional costs due to extensions that would have been applicable had they stayed. Therefore, keeping a good record of communications and agreements with the landlord is essential for both parties.

Importance of Reporting to HMRC

When dealing with extended leases, it is critical to keep up-to-date with the correct SDLT payments. Failure to report changes to HMRC in a timely manner can result in penalties or additional interest charges. Here are some essential points to remember:

• Each extension of the lease creates a new SDLT liability that must be assessed and paid accordingly.
• All changes must be documented and reported within the specified time frame to avoid penalties.
• Keep thorough records of all transactions, notifications, and communications regarding the lease and SDLT payments.

Conclusion

In the context of commercial leases under the Landlord and Tenant Act 1954, extensions beyond the original term impact SDLT calculations. Understanding how these extensions are treated, what NPV is, and how to report to HMRC ensures compliance and prevents unnecessary costs.

For further assistance, additional guidance, and specific cases, it may be helpful to consult a tax professional or legal adviser specialising in property law.