Stamp Duty – Commercial:
Stamp Duty Land Tax (SDLT) has risks for those tenants “holding over” as commercial tenant occupiers, when new lease terms are being negotiated.
Tenants in occupation of commercial premises who want to renew their lease will usually want to continue in occupation following the end of their lease term. This will also often suit the landlord, but nonetheless, the process of negotiating a new term and the details of the renewal can take some considerable time.
Stamp Duty Land Tax (SDLT) replaced Stamp Duty in December 2003. It is payable in respect of transactions involving the transfer of interests in land including the grants or assignments of leases and is a “personal/corporate” tax and involving the tax payer in making a tax return in respect of the land transaction. There is a complicated formula for calculating whether SDLT is due and how much, see here
One detail often overlooked by tenants during a lease renewal negotiation and the lease renewal process is the potential Stamp Duty Land Tax (SDLT) implication. Stamp Duty Land Tax may be payable on the renewal, but may also be payable in respect of the period following the end of the lease term and settling the renewal – and the application of Stamp Duty Land Tax rules to this period can be quite complex and difficult to interpret.
In many circumstances a business tenant will have a right to remain in occupation of a property, or a statutory right to renew its tenancy, at the end of the original term of its lease.
Where the tenant occupies the property for its business, they may be permitted to renew their lease at the end of the term under sections 24 to 28 of the Landlord and Tenant Act 1954 (LTA 1954). The term of the lease will continue by operation of law until a new lease is granted.
In certain circumstances, the parties may contract out of the provisions of the LTA 1954 and where the lease is contracted out, the tenant will not benefit from a statutory right to occupy the property at the end of the term, but may still be remaining in occupation.
If the tenant does remain in occupation after the end of the term, when the lease is so contracted out, then it is likely that its occupation will be either as a tenant on sufferance, as a trespasser, under a tenancy at will or under an implied periodic tenancy.
Where a renewal is negotiated between the parties, then the period of occupation between the end of the original term and the renewal is generally a “tenancy at will”.
Although the outcome may be slightly different depending on the specific facts in each case, for the purposes of this note, in either case (whether the lease is contracted out of the LTA 1954 or not), the period from the end of the term until the renewal is granted is referred to as the period of ‘holding over’.
Aside from the many, often complex negotiations around the commercial terms of a lease renewal, the question of Stamp Duty Land Tax should also be addressed. If Stamp Duty Land Tax is considered early in the renewal process, some common pitfalls (and penalties) can be avoided.
Where the original lease was subject to Stamp Duty Land Tax, then the period of holding over may be also. This will depend on a number of points, including:
- whether the tenant has a statutory right to a renewal under the LTA 1954 or not;
- whether the new lease is backdated to the end of the term of the original lease or starts at the date of completion; and
- how soon after the end of the original term the lease is settled.
The rules around Stamp Duty Land Tax can appear quite complex and there are a number of nuances, which can make their application quite tricky.
Generally, where a renewal lease is granted which is not backdated to the end of the original term, Stamp Duty Land Tax due on the original lease will be calculated by, in effect, tagging the period of holding over onto the original term.
Where the rents (and any premium) are relatively low, this may result in no additional Stamp Duty Land Tax being payable. It may also result in a Stamp Duty Land Tax return being required where no Stamp Duty Land Tax was payable under the original lease.
Thankfully, in recent years, the requirement to file a nil return, where no Stamp Duty Land Tax (or additional SDLT) is payable, has been done away with in many circumstances. But care should be taken as in some situations (such as where the original lease term, plus the period of holding is 7 years or more) a return may still be required, even where no additional Stamp Duty Land Tax is payable.
A further complication arises where the period of holding over exceeds 12 months. In this situation, the Stamp Duty Land Tax position will need to be considered and a return potentially filed, even though a renewal has not yet been settled. This is the case for each full 12 month period following the end of the original term.
Where a Stamp Duty Land Tax return is not filed when due, then an immediate £100 penalty may be payable and interest may also be levied on any Stamp Duty Land Tax due.
Stamp Duty Land Tax replaced Stamp Duty in December 2003 as a result of the Finance Act 2003 and since that date the VAT rate in the UK has also changed from 17.5% (applicable between 1 January2010 and 3 January 2011) to its current level of 20% (from 4 January 2011).
Given that Stamp Duty Land Tax is calculated by reference to rent (and any premium payable) inclusive of VAT, this can make calculations even more complex and presents a further potential trap into which unsuspecting tenants may fall.
If your lease term has expired and you are in a period of “holding over” or are soon to be holding over and want to speak to someone about how to avoid late filing penalties, then you need to speak to a professional property surveyor or lawyer.
Author: Robin Canning is a Commercial Property Lawyer with Wright Hassall LLP
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