Note: the Finance Bill 2019 contains provisions to reduce the SDLT filing and payment window from 30 days to 14 days for land transactions with an effective date on or after 1 March 2019.
Stamp Duty Land Tax (SDLT) is a tax on land transactions. It is (potentially) payable whenever a tenancy is created; while this is easy to remember at the start of a completely new lease, tenants also need to consider whether a new tenancy has been created if they remain in occupation at the end of the term.
This note provides an overview of the rules relating to SDLT when a commercial lease is renewed (we cover the general principles that apply to the calculation of SDLT in our note on Stamp Duty Land Tax at the start of the lease). This note does not cover residential leases, does not detail the reliefs that may be available and only looks at the law as is stands today. Be aware that the rules change frequently, are very complex and can sometimes be applied in unexpected ways, particularly where connected companies are involved. You should always seek advice specific to your particular situation.
1954 Act Lease Renewals
Many commercial leases have the protection of the Landlord and Tenant Act 1954 (“1954 Act”). At the end of the fixed term of a protected tenancy, the lease automatically continues on the same terms until it is terminated in accordance with the Act (creating a “continuation tenancy”). In addition, when the original lease is terminated the tenant has a right to take a new lease on the same terms; the landlord can only object to this in specified circumstances. For more information see our note 1954 Act: Does the Act apply? There are SDLT implication both during the continuation tenancy and on the grant of the new lease.
SDLT implications during the period of the continuation tenancy
Original lease was a stamp duty lease
Where the original lease was a lease to which the stamp duty regime applied (rather than stamp duty land tax), there is no SDLT liability during the continuation tenancy. As a good rule of thumb, stamp duty applied to leases granted before 1 December 2003 and SDLT to leases granted after this date. However, there are some exceptions to this so you should always check.
Original lease was an SDLT lease
Where the original lease was an SDLT lease there may be an additional SDLT liability while the continuation tenancy is ongoing, but only if the tenancy continues for more than a year after the contractual expiry date.
From the first day of the continuation tenancy the tenant has what is called a “growing” lease. At the end of the first year after the contractual expiry date you must look at how much SDLT would have been payable had the lease originally been granted for a period including that extra year. If more SDLT is due (or SDLT is now due where none was due before) it must be paid within thirty days after the end of the first year. If the lease continues on for another year, it is treated for SDLT purposes as growing again, and so on until either a renewal lease is granted or the lease is terminated.
SDLT at termination of the original lease
If the original lease is terminated and no renewal lease is granted, SDLT will be payable on the growing lease for the period between the contractual termination date and the actual termination date, in the same way as for the growing lease described above (even if the lease hasn’t yet grown by a full year). The payment and any return are due within thirty days after the actual termination date.
Where actual termination doesn’t occur until more than a year after the contractual termination date, the growing lease rules will already have been applied to extend the lease by a year or more. In this situation the additional tax is due only in respect of the period from the end of the “grown” lease until actual termination.
SDLT at the grant of the renewal lease
Original lease was a stamp duty lease
Where the original lease was a stamp duty lease the position is fairly straightforward as you just treat it like any other new lease grant. Provided that it’s above the threshold, SDLT is payable and a return is due within thirty days of the grant of the new lease.
In the unusual situation where an increased rent is agreed for the period from the termination of the original lease through to the grant of the new lease which does not reflect a true increase in the rent during this period, the increase will be taxed as a premium paid for the grant of the new lease. If it does reflect a true increase in the rent for that period, it can be ignored.
Original lease was an SDLT lease
Where the original lease was an SDLT lease, the rules work slightly differently (though the amount of tax payable is approximately the same) depending on whether or not the term of the new lease is backdated to the day after the contractual termination of the original lease. For example where a lease had a contractual termination date of 31 July 2013 and the renewal lease is granted on 1 May 2014, but the lease states that the term of the new lease commences on 1 August 2013, this is a backdated lease for SDLT purposes. However, if the renewal lease doesn’t give a term start date, or gives eg 29 September 2013 as the term start date, this is not a backdated lease for SDLT purposes.
Though the calculation is slightly different, as described below, in both cases SDLT is payable and a return is due within thirty days of the actual grant of the new lease.
New lease is not backdated
Where the new lease is not backdated (or is backdated to a date other than the expiry of original lease) the rent payable between the expiry of the original lease and the start of the new lease is treated for SDLT purposes as if it were payable under the new lease. If the new lease is granted after the end of the first year of holding over, so that the old lease has already “grown” for SDLT purposes, only the rent on which SDLT has not already been calculated is taken into account.
New lease is backdated
Where the new lease is backdated to the expiry of the original lease, the term of the new lease is always treated for SDLT purposes as beginning on the specified term commencement date.
Where the new lease is completed at some point during the first year after expiry of the contractual term SDLT is simply payable as if the lease had begun on the specified term commencement date (ie exactly the same position as if the lease is not backdated).
However, where the new lease is granted after the old lease has already “grown” the position is slightly different. An SDLT calculation will already have been done, and any additional tax due paid, in respect of the growing lease. When calculating the SDLT payable under the new lease you therefore treat the lease as if it had been granted on the specified term commencement date but you can claim overlap relief in respect of the rent already taxed under the growing lease. The effect of this is to reduce the rent taxed under the new lease by the rent on which SLDT has already been paid, so it will come to almost exactly the same payment as for a lease that has not been backdated; you just get there by a slightly different route.
Other lease renewals and extensions of the term
Where a lease does not have the protection of the 1954 Act a tenant may nonetheless remain in occupation at the end of the term or a new lease may be granted. Alternatively, steps may be taken to extend the term of the original lease either by way of a variation or the grant of a reversionary lease.
Remaining in occupation at the end of the term
A tenant may remain in occupation at the end of a contracted out lease on an informal basis. In order to establish whether any SDLT is payable in respect of this continued occupation, it is necessary to determine the basis of the tenant’s ongoing occupation.
Where the tenant simply remains in occupation and continues paying rent on a regular basis, it is likely that a periodic tenancy has arisen. When a periodic tenancy first arises it is treated for SDLT purposes as a one year fixed term tenancy. If the periodic tenancy continues into a second year it is treated as a two year fixed term tenancy and so on. If the SDLT threshold is exceeded the tenant will have to make an SLDT return and pay any tax due.
If SDLT is chargeable on the initial one year lease, a return will need to be made in the usual way (see our note on Stamp Duty Land Tax at the start of the lease). Where a return was made for the one year lease, a revised return will be required at the end of each additional year. Where no return was required for the one year lease, any year of the extended term may increase the rent above the threshold so that a first return is required when the term is extended.
The effective date for the initial one year fixed term tenancy is the first day of the periodic tenancy: this will be the date of the first payment of rent after the original lease has come to an end (often, though not always, the first day of continued occupation). For subsequent years the effective date will be the anniversary of this date. If an SDLT return is required it must be made, and any tax due must be paid, within thirty days of the relevant effective date.
Tenancy at will
Where a tenant continues to occupy under a true tenancy at will, no SDLT will be payable as tenancies at will fall outside the scope of SDLT. To be a true tenancy at will, the tenant’s occupation must be immediately determinable at the will of either party; if a periodic tenancy has arisen, by virtue of the payment and acceptance of rent, there will not be a tenancy at will. It is important to be aware that HMRC may consider an arrangement to be a periodic tenancy for SDLT purposes, even though a property lawyer would classify it as a tenancy at will, so care needs to be taken in determining whether or not SDLT is due.
Grant of a new lease – linking and overlap relief
A new lease may be granted after expiry of an earlier lease, either immediately or after a period of continued occupation. Sometimes the tenant will have a right or an option to take a new lease; at other times the new lease will be negotiated at arms-length.
The basic position
The starting point is that the new lease is taxed and a return is required in the usual way (see our note on Stamp Duty Land Tax at the start of the lease). Note that if there has been a delay between the end of the original lease and the grant of the new lease and additional rent becomes payable at the grant of the new lease in respect of this period, this additional rent will be treated as a premium payable in respect of the new lease; this must be taken into account in your SDLT calculations.
Is the new lease linked with the original lease?
Whether or not the new lease is linked with the original lease is a question of fact. Where the new lease is entered into after completely new negotiations, the leases will not be linked. However, where the tenant has a right to renew the lease, the new lease may be linked to the original lease. If the new lease is found to be linked to the original lease, and the original lease was not a Stamp Duty lease, you need to calculate SDLT as if the two leases were both granted when the original lease was granted, for the total term and in consideration of the total rent payable. The purpose of this is to prevent tenants benefitting from a series of nil-rate thresholds (and thereby avoiding SDLT liability). Note that this may result in an SDLT liability – and the requirement for a return – in respect of an earlier lease where there was no SDLT liability when the lease was granted.
Claiming overlap relief
Overlap relief will not be relevant where the new lease is granted immediately after the original lease comes to an end, or where no SDLT has been paid in respect of the period of continued occupation between the end of the original lease and the grant of the new lease. However, where a periodic tenancy arose, and SDLT was paid in respect of this periodic tenancy, overlap relief will be available to reduce the rent element relating to the overlap period by the rent already taken into account for SDLT purposes.
Surrender and regrant or deed of variation to extend the term
Where a tenant knows that it wishes to renew the lease, but has no contractual right to do so, it may prefer to negotiate and agree the extension immediately rather than wait until the current lease comes to an end. On way in which this could be done is by a surrender of the existing lease and the grant of a new, longer, lease in its place. Alternatively a deed of variation could be used to extend the term; this takes effect as a surrender and regrant and is treated for SDLT purposes in exactly the same way as an express surrender and regrant.
SDLT is payable on the rent due under the new lease (or the deemed new lease), which will have the same start date as the original lease but a later end date. Overlap relief will be available to reduce the rent which relates to the overlapping period by the rent already taken into account for SDLT purposes. Note that where the original lease was a Stamp Duty lease, overlap relief is not available so SDLT will be payable on the full rent.
Grant of a reversionary lease
Another way in which the lease term may be “extended” is by the grant of a reversionary lease to take effect at a future date when the current lease comes to an end. For SDLT purposes the effective date of the reversionary lease is the date of grant, not the date on which the term commences. This means that, if a return is required, this must be made within thirty days of the date of grant. Bear in mind that if a tenant had a right to the reversionary lease, the original lease and the reversionary lease may be linked.
If you have any questions about SDLT on renewal leases, please speak to one of the solicitors in our real estate team. We are happy to help with completing the return on your behalf, and calculating the amount of SDLT due. While we are unable to give detailed advice on more complex transactions we are happy to work with your own tax advisers or recommend an expert who will be able to assist.
The information set out in this briefing note is provided free of charge for information purposes only to clients and prospective clients of this firm. We make every reasonable effort to check that the information is accurate and up to date but we cannot accept any responsibility for its accuracy or correctness or for any consequences of relying on it. Please note that the information does not and is not intended to amount to legal advice and you are advised to obtain specific personal advice from us or another lawyer about any case or matter and not to rely on the information or comments in this briefing note.
© BSDR 2018