HMRC SDLT: SDLTM17115 – Miscellaneous Provisions: ‘’Rent’’ payable for a period before grant: Examples

Principles and Concepts of SDLTM17115

This section of the HMRC internal manual provides guidance on the treatment of ‘rent’ payable for a period before the grant of a lease. It includes examples to illustrate the application of these rules.

• Explains the concept of ‘rent’ in the context of lease agreements.
• Details the provisions applicable to rent payable before lease grant.
• Provides examples to clarify the application of these provisions.
• Aims to ensure compliance with HMRC regulations.

Understanding SDLTM17115 – Rent Payable Before Grant: Examples

Introduction to Key Concepts

When dealing with property leases, specifically in the context of Stamp Duty Land Tax (SDLT), it is important to understand how rent that is payable for a period before the lease is officially granted is treated. The following guidance clarifies how such situations work.
The main goal is to accurately calculate the net present value (NPV) based on the lease terms.

Key Terms Explained

– Lease: A legal agreement allowing one party (the tenant) to use a property owned by another party (the landlord) for a specified period in exchange for rent.

– Rent: The payment made by the tenant to the landlord for the use of the property.

– Net Present Value (NPV): A calculation that expresses the current value of a series of future cash flows, including rent payments, adjusted for the time value of money.

– Holding Over: This occurs when a lease has expired, but the tenant continues to occupy the property and pay rent while a new lease is being negotiated.

Example 1: Retail Unit Lease

In this scenario, a retail lease is granted on 1 July 2015 for a shop in a shopping centre. The lease is for a period of 5 years starting from 1 January 2015, with a rent set at £45,000 per year.

Important points to note:
– The lease has not been substantially performed before it is officially completed on 1 July 2015.
– The rent for the time period before the lease is granted (1 January 2015 to 30 June 2015) cannot be claimed back. Even though the lease starts on 1 January, the landlord has not provided access to the property, making it non-chargeable as rent.
– Consequently, for the NPV calculation, the rent for the initial period is ignored.

The rent recognised in the NPV calculation is as follows:

– Year 1 (1 July 2015 to 30 June 2016): £45,000
– Year 2 (1 July 2016 to 30 June 2017): £45,000
– Year 3 (1 July 2017 to 30 June 2018): £45,000
– Year 4 (1 July 2018 to 30 June 2019): £45,000
– Year 5 (1 July 2019 to 31 December 2019): £22,500 (the rent is halved because the lease ends halfway through the year)

In total, the lease runs for a period of 4 years and 184 days, and the resulting NPV with consideration for the full years and the partial year amounts to £184,232.

Example 2: Business Lease and Holding Over

This example looks at a business lease situation where the previous lease term has ended, but the tenant is still occupying the property, paying the same rent while negotiating a new lease.

– The previous lease (often called the ‘old’ lease), ended on 31 December 2014, and the tenant was paying a rent of £50,000 per year.

– The new lease is granted on 1 July 2016, starting from 1 January 2015, at a rent of £70,000 per year.

How the tax treatment varies can depend on specific circumstances related to the ‘old’ lease and the rent increase:

Scenario 1: Old Lease was Granted Under SDLT and Increase is Not for New Lease

– The rent of £50,000 paid during the holding over period is ignored for SDLT. This is because it refers to the old lease, which is not subject to new SDLT calculations.

– The £20,000 increase in rent (from £50,000 to £70,000) is viewed as the granting of a new lease. If the original lease was granted after 1 January 2000, this increase for 18 months could trigger tax as the original lease has effectively changed.

Scenario 2: Old Lease was Granted Under SDLT and Increase is for New Lease

– Again, the £50,000 rent paid during the holding over is ignored.

– In this case, the £20,000 increase (which is the difference between the old and new rents) becomes a premium for the new lease. That means £30,000 of the premium amount is subject to SDLT as the increase applies directly to the granting of the new lease.

Scenario 3: Old Lease was Granted Under SDLT

– Here, SDLT payments will be calculated based on the NPV of the new £70,000 rent backdated to the start date of 1 January 2015.

– Overlap relief could be applied for SDLT already paid on the NPV of the previous lease’s rent if its terms were varied. Furthermore, it is essential to remember that under paragraph 3(3), Schedule 17A, Finance Act 2003, a tax return must be submitted within 30 days after each year of holding over.

Importance of Accurate Record-Keeping

Keeping precise records of all rents paid, lease terms, and any changes made during the holding over period is vital. This record will help you in:

– Calculating the correct NPV for SDLT purposes.
– Justifying any claims for relief or exemptions.
– Ensuring compliance with tax return requirements.

Final Tips for Lease Transactions

– Be clear about the lease dates and terms: Understand when your lease starts and the implications of various lease structures, including holding over.
– Consult a professional: If you’re unsure about tax implications with your lease agreements, it is wise to consult a tax specialist or a solicitor experienced in property law.
– Stay updated with HMRC guidelines: Tax regulations can change, so be vigilant for any updates that could affect your situation.

Conclusion Elements to Consider

This guidance clarifies how to navigate the complexities of rent payable before a lease grant, which is particularly important in property transactions. For substantial financial commitments like leases, understanding SDLT implications helps safeguard against possible penalties and unexpected costs in the long run.

Further resources include specific HMRC pages on SDLT and related issues to provide more detailed information for your individual situation. Always ensure to reference the most current guidance or seek advice when making significant financial decisions regarding property.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM17115 – Miscellaneous Provisions: ‘’Rent’’ payable for a period before grant: Examples

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