HMRC SDLT: SDLTM18750 – Term of a lease: Backdated lease granted after lease has continued by tacit relocation

Principles of Backdated Leases and Tacit Relocation

This section of the HMRC internal manual discusses the implications of backdated leases granted after a lease has continued by tacit relocation. It outlines the following principles and concepts:

Understanding the legal framework surrounding backdated leases.
Exploring the concept of tacit relocation and its impact on lease agreements.
Guidance on how HMRC interprets these situations for tax purposes.
Examples of scenarios where these principles apply.

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Read the original guidance here:
HMRC SDLT: SDLTM18750 – Term of a lease: Backdated lease granted after lease has continued by tacit relocation

Understanding SDLT Rules for Backdated Leases

This article provides information about how Stamp Duty Land Tax (SDLT) is applied when a backdated lease is granted after the lease has already continued through tacit relocation. This situation arises when a lease expires but the tenant remains in the property without a new formal agreement, leading to the assumption that they have renewed the lease. Here’s a clear breakdown of what you need to know.

What is SDLT?

Stamp Duty Land Tax (SDLT) is a tax that applies to land transactions in England and Northern Ireland. It is paid when you buy a property or lease land. The amount of SDLT you pay varies based on the value of the property or lease.

What is Tacit Relocation?

Tacit relocation occurs when a tenant continues to occupy a property after their lease expires without signing a new agreement, and the landlord allows this to happen without objection. In essence, both parties act as if the lease is still in place, even though it has technically ended.

Backdated Leases and SDLT

A backdated lease is one that is officially documented after the tenant has already been occupying the property under the tacit relocation principle. This lease might specify that it starts from a date in the past, reflecting the tenant’s actual occupation period.

Key Points to Consider

When dealing with backdated leases after tacit relocation, there are several important considerations regarding SDLT:

Tax Liability: SDLT is payable on the premium (the upfront payment for the lease) and the annual rent for the duration of the lease. If the lease is backdated, the SDLT needs to be calculated based on the full term as specified in the lease.
Documentation: It is vital that the lease document clearly states the backdated start date and all other relevant terms and conditions. The more detailed the document, the better it helps with tax calculations.
Duration of the Lease: If the lease has a fixed term or is renewed under tacit relocation, SDLT may be assessed differently compared to a lease that simply continues without a formal agreement.

Calculating SDLT for Backdated Leases

If you have a backdated lease, you will need to provide the following information to calculate your SDLT:

The total value of the rent that will be paid over the lease term.
The premium amount, if applicable.
The start date of the lease (backdated). This is essential for proper tax assessment.

For example, if a tenant continues to occupy a property for three years under tacit relocation but then formalizes their lease with a start date that goes back two years, the SDLT will be calculated on the total rent due over the three-year period, even if the backdated period has already passed.

When to Pay SDLT

The SDLT payment usually is due within 14 days of the effective date of the lease. In the case of backdated leases, this may mean that you need to pay SDLT based on the earlier start date reflected in the lease agreement. It is important to keep in mind the following:

Filing a Return: When you enter into a lease, you must file an SDLT return unless the transaction is exempt from tax. This includes situations of backdated leases.
Penalties for Late Payment: If the SDLT isn’t paid on time, you may face penalties and interest charges. Ensure that you keep track of dates and payments.
Documentation Requirements: When submitting your SDLT return, you’ll likely need to provide a copy of the lease document along with your tax calculations.

Example of SDLT Calculation

Consider a scenario where a tenant has been in a commercial property for two years without a formal lease and is now formalizing their agreement with a backdated lease. The following information is provided:

The rent for the property is £12,000 per year.
The agreed premium is £5,000.
The backdated lease starts two years prior to the formal agreement.

Here’s how you would calculate SDLT:

Calculate total rent over the three-year lease (2 years backdated + 1 future year): 3 years x £12,000 = £36,000.
Add the premium: £36,000 + £5,000 = £41,000 total consideration.
Refer to the SDLT threshold for calculations. For this value, locate the appropriate SDLT rate.
Calculate the SDLT due based on the total consideration of £41,000.

Examples of SDLT Rates

The amounts of SDLT vary depending on the total value of the lease. For example:

If the total rent and premium exceed £125,000, the SDLT rate may start at 2% on the amount above this threshold.
A property value between £125,000 and £250,000 might incur 5% SDLT, while properties valued above that will be subject to higher rates.

Longer-Term Leases

When dealing with longer leases, the backdated start date can significantly affect the SDLT due.

Strategic Planning: If a backdated lease extends beyond three years, consider seeking professional advice to manage SDLT liabilities effectively.
Potential Exemptions: Sometimes, exemptions may apply under specific circumstances, so it’s wise to investigate this when setting up the lease.

Record Keeping

Proper record keeping is essential when dealing with SDLT and backdated leases. You should maintain:

A copy of the lease agreement.
Records of all payments made, including rent and any premiums.
Evidence of your calculations for SDLT.

Having clear records can assist in case of an audit or if HMRC questions your SDLT return.

Conclusion

When establishing a backdated lease after a period of tacit relocation, understanding how SDLT applies is key. Keep accurate records, stay informed on your SDLT obligations, and consider professional advice when navigating complex lease arrangements.

For more specific guidance, refer to the official SDLT guidance or consult with a tax advisor to ensure compliance with all requirements in your situation.