Read the original guidance here:
HMRC SDLT: Example of SDLT on Substantial Performance of Non-Residential Lease Agreement

Introduction to SDLT and Lease Agreements

When dealing with property leases, it is essential to understand how Stamp Duty Land Tax (SDLT) applies, particularly in relation to non-residential agreements. This article explains a specific example of how SDLT works when a lease agreement is substantially performed and the implications of that performance.

What Happens on Substantial Performance of a Lease?

Substantial performance of a lease occurs when the parties involved have met their obligations to a significant extent, even if the entire agreement has not yet been fully executed. To illustrate this, we will look at an example:

Example: A non-residential lease agreement was exchanged on 1 January 2015 and was substantially performed on 1 February 2015. The lease is set for a duration of 10 years from a date that will be determined later, and it includes a rent review to align with the market rent at the end of the fifth year. The actual lease was granted later, on 1 May 2015.

Understanding the Nature of the Lease

At the time of its substantial performance on 1 February 2015, the lease agreement operates as an indefinite term. Due to this, it is treated as a notional lease for a term of one year. It is important to determine whether SDLT becomes applicable.

– If the Net Present Value (NPV) of the lease exceeds the designated threshold, SDLT must be paid.
– The reporting of this lease is essential, as it is a notional lease that lasts from 1 February 2015 to 31 January 2016.
– The SDLT liability must be notified by 2 March 2015, which is 30 days after the substantial performance.

Linking Transactions and SDLT Notifications

When the actual lease is granted on 1 May 2015, it forms a linked transaction with the notional lease created earlier during substantial performance. This requires a new notification due to a crucial factor:

– The combined lease, which includes both the notional and actual leases, now has a defined term.
– SDLT must be due on the rent that was not considered at the time of reporting the substantial performance.

Overview of Overlap Relief

Overlap relief is not automatically applied by simply answering ‘yes’ to a specific question on the land transaction return. It needs to be correctly reported based on the timing and nature of the lease:

– In the earlier example, overlap relief would be claimed by only reporting the rent payable in the first year of the lease from 1 February 2016 to 30 April 2016.
– This one-year lease period excludes parts that overlap with the notional lease.

Example Calculation:
For the first year of the lease:
– The rent payable for this calculation is £51,205, which is derived from the annual rent of £210,000 adjusted for the part of the year that is not overlapping with the notional lease (89 days out of 365).
– The NPV for the remainder of the lease is taken as the annual amount of £210,000.

Key Points to Remember

– SDLT applies when a lease reaches substantial performance and exceeds the financial threshold.
– Notifications for SDLT must be timely and accurate, particularly when linking leases.
– Overlap relief must be calculated and reported correctly to take full advantage of any benefits.

Understanding these aspects can help in managing your SDLT obligations efficiently when dealing with non-residential leases and ensuring compliance with HMRC guidelines.