HMRC SDLT: SDLTM17070 – Miscellaneous Provisions: Grant of a reversionary lease

Grant of a Reversionary Lease

This section of the HMRC internal manual outlines the principles and concepts related to the grant of a reversionary lease. It provides guidance on various provisions and their implications.

  • Explains the definition and nature of a reversionary lease.
  • Details the tax implications associated with granting such leases.
  • Discusses relevant legal provisions and their application.
  • Offers examples to illustrate key points.
  • Provides references to related sections for further information.

SDLTM17070 – Miscellaneous Provisions: Grant of a Reversionary Lease

Definition of a Reversionary Lease

A reversionary lease is a type of lease that begins after the date it is granted. This means tenants will not be able to use the property until a specified future date.

Effective Date for Stamp Duty Land Tax (SDLT)

For stamp duty land tax purposes, the key date to consider for a reversionary lease is the date it is granted, rather than the date when the lease actually begins. This is important for calculating any tax obligations or allowances.

Important Points to Note:

  • The effective date for stamp duty land tax is the grant date.
  • The calculations for tax thresholds, rates, and exemptions depend on the rules that are applicable on the grant date.
  • When calculating the net present value of the rent, the start date of the lease is considered. This reflects the fact that while the lease is legally effective from the grant date, the tenant will not occupy the property until a later date.

Net Present Value Calculations

When it comes to calculating the net present value (NPV) of the rent for a reversionary lease, it is essential to note that this calculation begins from the lease start date, not from the grant date.

What is Net Present Value?

Net present value is a method used to determine the current value of future cash flows, here, the rent paid over the years of the lease. For a reversionary lease, this means that only rental payments starting from the beginning of the lease term are considered.

Example Case of Reversionary Lease

Consider a situation where a reversionary lease is granted on 1 December 2015. This lease has a term beginning on 1 December 2020 and ending on 30 November 2030, with an annual rent set at £100,000.

Notification and Tax Payment

For this particular lease, it is necessary to notify the relevant authorities about the grant of the reversionary lease. Any stamp duty land tax that must be paid needs to be reported on or before 31 December 2015, which is the end of the month in which the lease was granted.

Calculating the Net Present Value

The calculation for the net present value (NPV) of the rent is £831,660 over the entire duration of the lease. However, it is important to focus on how the calculation works for the first year:

  • The NPV for the first year’s rent is calculated as £100,000 discounted at a rate of 3.5%.
  • It is not calculated as £100,000 being discounted six times, as this would incorrectly consider the rent for six future years instead of just the first year.
  • Thus, the calculation starts at the actual first year of the lease term, which for this example is 1 December 2020.

Comparison to Future Lease Agreements

It is vital to differentiate a reversionary lease from an agreement to grant a lease at a future date. In the case of a standard future lease agreement, the effective date for tax calculations could differ, and taxpayers should take note of those differences. For more information, see SDLTM10040.

Conclusion

This article outlines the key aspects of reversionary leases concerning stamp duty land tax. By understanding when taxes apply and how to calculate the net present value of rent, property owners and tenants can ensure they comply with applicable tax obligations effectively.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM17070 – Miscellaneous Provisions: Grant of a reversionary lease

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