HMRC SDLT: SDLTM14070 – Treatment of continuing indefinite term leases

Treatment of Continuing Indefinite Term Leases

This section of the HMRC internal manual provides guidance on the treatment of continuing indefinite term leases. It outlines the principles and concepts relevant to the taxation and legal considerations of such leases.

Defines what constitutes an indefinite term lease.
Explains the tax implications for both lessors and lessees.
Describes the legal framework governing these leases.
Offers examples to illustrate key points.
Provides guidance on compliance and reporting requirements.

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Read the original guidance here:
HMRC SDLT: SDLTM14070 – Treatment of continuing indefinite term leases

Treatment of Continuing Indefinite Term Leases

This section explains how indefinite term leases are handled under Stamp Duty Land Tax (SDLT) rules when they continue beyond their initial one-year term. Here are the essential points to understand:

Understanding Initial Terms

Indefinite term leases usually start with a notional initial term of one year. This means that even though the lease is indefinite, for tax purposes, it is treated as if it has a one-year term at the beginning.
If the lease continues beyond this initial one-year term, its treatment for SDLT purposes aligns with how fixed-term leases are treated.

How Lease Duration Affects SDLT

According to the relevant regulations (FA03/SCH17A/PARA4), if an indefinite lease continues past the notional initial term, it is treated as a lease for a two-year term starting from the date the lease was granted. This is regardless of how long the lease continues in reality.

Calculating Total Net Present Value (NPV) of Rent

– If SDLT was charged on the original 12-month lease:
– The total NPV of the rents may increase because the notional term has been extended.
– You will need to submit a revised return for SDLT.

– If SDLT was not charged on the original lease:
– The extended term could result in the total NPV falling within the range that requires SDLT.
– In this case, you must notify HMRC using form SDLT1. If applicable, also use forms SDLT2, SDLT3, and SDLT4.
– This notification should be sent to the Stamp Taxes office within 30 days after the one-year initial term ends.

Continuation Beyond the Two-Year Term

If the lease continues beyond the two-year term:

After the end of the two years, the lease is considered to be a notional lease for three years from the date it was originally granted (or deemed granted).
Just as before, you need to provide a notification or submit a revised return if necessary.

Further Extensions of Lease Duration

If the lease continues even further:

After three years, the lease is treated as a notional lease for four years from the date of grant (or deemed grant).
This process continues, incrementing the notional term by one year with each extension, until the lease is ended or a new lease agreement is made.

Notification Requirements

It is important to note:

A lease for an indefinite term does not require notification just because its notional term has been extended to seven years or more.
Notification is only necessary when the lease is originally granted for a term of seven years or more, and if that grant includes chargeable consideration.

Examples for Better Understanding

Here are some examples to illustrate how these rules apply:

Example 1: Extension of a Lease

A landlord grants a lease for an indefinite term that continues after its initial period of one year.
Since the lease is not renewed and continues past the one-year mark, it is treated as lasting two years for SDLT.
If SDLT was initially charged, the landlord must reassess the NPV of the rent and submit a revised SDLT return.

Example 2: No SDLT Initially Charged

A tenant has a one-year lease that was granted with no SDLT charge.
When the lease continues beyond the first year, you may need to notify HMRC if the total NPV of the continued lease falls into a chargeable range.
This notification must be made using form SDLT1 within 30 days of the first year’s end.

Example 3: Continuing Beyond Two Years

If the same lease continues for a total of three years, it will now be treated as a notional lease for four years.
Landlords must continue to assess if a notification or revised return is needed for SDLT.

Tax Implications to Consider

– If you are involved in managing leases with indefinite terms, it’s critical to stay aware of how these leases can affect SDLT obligations.
– Keeping track of the NPV of rents is essential for understanding if additional tax liabilities may arise as the lease continues.
– Always ensure that you meet the deadlines for notifying HMRC to avoid any potential penalties or interest charges.

Final Thoughts on Indefinite Leases

Indefinite term leases can complicate tax obligations, especially as they extend beyond their initial periods. It is vital to be clear on the implications for SDLT, especially regarding notifications and returns to HMRC. Understanding these principles will help mitigate tax risks and ensure compliance with the regulations.