Stamp duty land tax and 1954 Act lease renewals

04/01/10

A business lease which has the protection of the Landlord and Tenant Act 1954 does not automatically come to an end on its contractual termination date. Instead, provided that the tenant remains in occupation, it will continue to run until one party serves a notice bringing it to an end. Following this a renewal lease will often be granted.

The rules about how what Stamp Duty Land Tax you need to pay during the renewal process can be rather confusing. This note has been prepared to help you understand these rules, though please note that there are often exceptions and you should always take advice in respect of a particular transaction.

Do I need to do anything at the contractual end date of the original lease (while the lease is automatically continuing)?

The answer to this question depends on whether the original lease was granted when the old Stamp Duty regime was in place or when the new SDLT regime had come in. Broadly speaking you will have a Stamp Duty lease if it was completed before 1 December 2003 and an SDLT lease if it was granted on or after this date. However, there are some exceptions to this rule so if in doubt you should always check.

I have a Stamp Duty lease

If you have a Stamp Duty lease then you don't need to do anything at the contractual end date.

I have an SDLT lease

If you have an SDLT lease then you may need to make a return, and pay SDLT, within 30 days of the contractual end date. It can be very easy to miss this date if you are just continuing in occupation as normal so you should keep a careful note of the contractual end date for any protected leases.

The reason that you may need to make a return at this stage is that the lease is treated as a "growing" lease. What this actually means is that if your original lease was for, eg, a term of five years then on the day after the contractual end date it is treated for SDLT purposes as if it had been granted for a term of six years.

You therefore need to redo all the calculations and work out how much you would have paid when the lease was granted if had been granted for six years instead of five. If you made a return and paid SDLT when the lease was granted you will definitely need to make an additional payment now. However, even if you didn't pay any SDLT when the lease was granted (because it was below the SDLT threshold) the extra year may be enough to bring it above the threshold. In this case you will now need to make a full return and pay the SDLT due.

If you remain in occupation for a further year then on the day after the anniversary of the contractual end date the lease will "grow" by another year and you will need to redo the calculations again - and so on until you either leave the property or a new lease is granted.

How is SDLT calculated when the new lease is granted?

Again, this depends on whether the original lease was a Stamp Duty lease or an SDLT lease. It also depends on whether you are paying a lump sum at completion (eg to represent an increased rent during the time that the original lease was continuing) and, if the original lease was an SDLT lease, on whether the start date in the new lease will be backdated to the end date in the original lease.

I had a Stamp Duty lease and there is no extra payment being made

This is the most straightforward situation - you simply make a normal return in respect of the new SDLT lease which is granted.

I had a Stamp Duty lease and an extra payment is being made

It is necessary to understand the purpose of the additional payment. If the payment genuinely represents additional market rent payable during the holding over period then this sum will almost certainly not be taxable. However, if the payment doesn't truly represent an increase in market rent (even if the new lease says that this is what it is for) then it will be taxed as a premium and SDLT will be payable on it.

I had an SDLT lease and the new lease is being backdated to the contractual end of the original lease

Where the original lease was an SDLT lease and the new lease is backdated to either the contractual end date or the day after the contractual end date of the original lease then special rules apply. These rules apply in the same way regardless of whether any lump sum payment is being made at completion.

Usually when calculating SDLT payable you ignore the start date specified in the lease and you calculate SDLT as if the lease starts on the day on which it is actually completed. However, under the special rules you treat the new lease as starting on the specified date, which may be months or even years before it is actually completed. SDLT is calculated as normal but using the earlier start date.

However, this is complicated by the fact that SDLT may already have been paid for part of this period under the growing lease rules. Where SDLT has already been paid it is possible to claim overlap relief so as to ensure that you don't end up paying twice.

I had an SDLT lease and the new lease is not fully backdated; no extra payment is being made

Where the new lease is not backdated, or is backdated but not all the way to the end of the original lease, and no extra payment is being made, then you may simply be able to make a normal return in respect of the new SDLT lease which is being granted. However, where you have made SDLT payments in respect of the growing lease you are able to claim overlap relief.

I had an SDLT lease and the new lease is not fully backdated; an extra payment is being made

If an additional payment is being made you need to determine whether it represents a genuine increase in the market rent payable during the holding over period. If it does then the increased rent will not usually be taxed at all (though it may be if the original lease was for a term of less than five years or if the increase is an "abnormal" increase). If it does not represent a genuine increase in market rent it will be taxed as a premium.

Either way, overlap relief will be available in respect of any SDLT payments made in respect of the growing lease.

Further advice and information

It is your responsibility as the tenant under a lease to check whether you need to make a tax return when a lease continues beyond the contractual end date. We cannot take responsibility for this though we would be very happy to advise on any issues and to assist in making any required returns.

When we are acting for you on the grant of a renewal lease we will advise you as to the amount of SDLT payable, based on the rules as summarised above. For high value leases will also be able to help you decide whether it is worth backdating the lease so that the special rules apply as this can sometimes result in an SDLT saving. However, it is worth being aware that the rules are very complicated to apply so we may sometimes advise that any saving will be less than the time it will take us to calculate this for you. We will always discuss this with you and agree the best approach in any particular situation.