HMRC SDLT: SDLTM17065 – Miscellaneous Provisions: Linked leases: Single scheme: Pre-implementation: Example
Principles and Concepts of Linked Leases
This section of the HMRC internal manual provides guidance on linked leases within a single scheme, focusing on pre-implementation examples. It outlines the key principles and concepts involved in handling such leases.
- Explains the concept of linked leases and their implications.
- Details the procedures for managing leases within a single scheme.
- Provides examples to illustrate pre-implementation scenarios.
- Offers guidance on compliance with HMRC regulations.
Read the original guidance here:
HMRC SDLT: SDLTM17065 – Miscellaneous Provisions: Linked leases: Single scheme: Pre-implementation: Example
Understanding Linked Leases and Stamp Duty Land Tax
What is a Linked Lease?
A linked lease involves two or more leases that are connected in some way, even if they are granted on different premises and at different times. In this case, the leases are treated as a single arrangement for tax purposes under certain laws.
Example of Linked Leases
Consider the following scenario:
– Lease for Shop 1 is granted on 1 November 2003.
– Lease for Shop 2 is granted on 1 June 2005.
– Both leases are non-residential but are for different locations.
Even though these leases are not successive, they are linked because they are part of a single scheme under the law (specifically, FA03/S108).
Calculating Tax on Linked Leases
For tax purposes, you can calculate the total tax that would apply if the linked leases were treated as one single transaction. This involves a few steps.
Step 1: Calculate the Net Present Value (NPV)
The Net Present Value (NPV) is a financial term used to determine the current worth of future cash flows from a lease. While the concept of NPV isn’t generally applied to leases granted before the introduction of stamp duty land tax (SDLT), it needs to be taken into account for linked leases.
– Assume the NPV of Shop 1 is £80,000 (let’s call this NPV1).
– Now, calculate the NPV for Shop 2, which we assume to be £120,000 (we’ll call this NPV2).
To find the total NPV (TNPV) for both leases:
– TNPV = NPV1 + NPV2
– TNPV = £80,000 + £120,000 = £200,000
Step 2: Determine Taxable Amount on Shop 1
Since Shop 1 was part of the stamp duty lease system, no SDLT is applicable. Therefore, you can ignore any tax that would be due on Shop 1 at this stage.
Step 3: Calculate Tax on Shop 2
Now, calculate the tax that would be charged on Shop 2 if both leases were treated as a single transaction based on the TNPV you just calculated:
– TNPV for Shop 2 is also £200,000.
Next, find the threshold for tax that was in place on 1 June 2005:
– The threshold at that time was £150,000.
To calculate the tax due:
– Taxable Amount = TNPV – Threshold
– Taxable Amount = £200,000 – £150,000 = £50,000
The tax applies at a rate of 1% for amounts exceeding the threshold:
– Tax Due = £50,000 * 1% = £500.
Step 4: Apportion Tax Between the Leases
Now, distribute the total tax charge based on the proportion of the individual NPVs of the leases:
– The NPVs are in the ratio of 80:120 (or 8:12).
– Total parts = 80 + 120 = 200.
Now to apportion:
– Amount for Shop 1 = (80/200) * £500 = £200 (however, remember that no tax is due on Shop 1).
– Amount for Shop 2 = (120/200) * £500 = £300.
Final Note on Notification
For notification purposes, it is crucial to state the effective date of the lease transactions. In this instance, the effective date is 1 June 2005.
This example illustrates how to handle linked leases for tax purposes, specifically under SDLT. By following these steps, you can accurately calculate the tax implications involved with linked transactions in commercial leases.