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Dean Wootten provides practitioners with an insight into the complexities of the new stamp duty land tax on leases.

Since 1 December 2003 practitioners have had to cope with the idiosyncrasies of stamp duty land tax (SDLT) when dealing with clients looking to acquire or renew a lease. This is a complex area and a solicitor should always be engaged when considering a lease transaction.

Notifiable Lease Transactions
If a lease transaction is notifiable, a land transaction return must be completed by the tenant and sent to the Inland Revenue. A lease transaction is notifiable if:

• the lease is for a term of seven years or more (or treated as being for a term of seven years or more) or
• SDLT is due on the premium and/or the rental element of the lease.

In order to ascertain the level of SDLT a practitioner will need information on the lease premium, the rent due and the length of the lease.

Calculation of SDLT
SDLT is calculated separately on the premium and the rentals due under the lease. Once calculated the SDLT due on these two elements is then added together and entered onto the land transaction return as a total figure.

Lease Premium
The lease premium is subject to SDLT in the same way as the purchase of a property would be. Table 1 shows the rates of SDLT payable on the premium. However, if the average annual rental under the lease exceeds £600 per year, the zero rate band does not apply. Instead the 1% rate applies in cases which would otherwise have fallen within the 0% band. Average annual rent is determined by the ascertainable rent each year. Rent is ascertainable if you know you are going to have to pay at least this amount for the year. For example:

• if the rent you have to pay depends entirely on the turnover of your business, then there is no ascertainable rent as there is no amount you know you will have to pay
• if the rent you have to pay depends on the turnover of your business and you have a minimum amount you have to pay, the minimum rent due is the ascertainable rent
• if the rent you have to pay is a fixed amount plus an amount based on percentage of turnover, the ascertainable rent is the fixed amount you have to pay, excluding any percentage amount
• if your rent is fixed, or any increases in the rent are known from the outset, the ascertainable rent is the amount known from the outset.

Average annual rent is calculated by adding all the ascertainable rent together and dividing it by the term of the lease.

Lease Rentals
The second element of SDLT is based on the rental payable during the term of the lease. Table 2 shows the rates of SDLT that apply.

Notice that where the net present value of rent (NPV) exceeds the 0% threshold, the 1% rate does not apply to the whole of the NPV but only applies to the excess above the threshold. This is unusual in the context of stamp duty and SDLT, where the rate usually applies to the whole of the consideration.

The NPV of the rental stream over the term of the lease depends on the term of the lease and the amount of rent payable in the first five years. The Inland Revenue has provided lease factor tables in their Stamp Duty Information Bulletin 6 to assist practitioners with the NPV calculation.

If the rent remains fixed for the first five years the calculation is relatively straightforward. Practitioners simply use the cumulative factor quoted for the term of the lease and apply it to the annual rent. For example if we had a 20 year lease on a commercial property at an annual rent of £15,000 we would use the cumulative factor of 14.21240330 to arrive at an NPV of £213,186. The excess over £150,000 would be charged to SDLT at 1%. Rent reviews and break clauses are generally ignored after the first five years.

If the annual rent varies in the first five years the method of calculating the NPV is amended. The practitioner would need to determine the amount of rent payable for each of the first five years of the lease. If this cannot be determined a reasonable estimate would suffice. Rent after year five is deemed to be equal to the highest 12 month rental period during those first five years. This is normally referred to as the ‘year six’ rent.

We then apply the individual lease factors to each of the first five years to ascertain the NPV of those years. We would apply the year one factor to year one rental, the year two factor to year two rental and so on. The factor to apply to the year six rental amount depends on the term of the lease. If you have a ten year lease, apply the factor for year ten to the rent used for year six. To determine the NPV of total rentals we then just add together the figures obtained for years one to five (five figures) and the figure obtained for year six onwards. This will be a maximum of six figures to add together. This total is the NPV of the rent on which SDLT is charged, subject to the 0% threshold.

Example
Max has acquired a 40 year commercial lease with a premium of £100,000 and an annual rent based on 5% of turnover or £20,000, whichever is the greater. Rent payable in the first five years is estimated to be £20,000 for years one and two, £22,000 for year three and £25,000 for years four and five.

SDLT on Premium
The average annual rent is £20,000 and so the premium threshold becomes £0. SDLT is due on the premium at a rate of 1% as the premium is not more than £250,000. The SDLT due on the premium is therefore £1,000.

SDLT on the Lease Rentals
As the rent changes in the first five years, we must use the individual year factor tables (see Table 3).

The highest rent payable in any twelve month period within the first five years is £25,000 and this is used as the rent for year six onwards. The total NPV of £521,672 is above the commercial threshold and SDLT at 1% is due on the NPV in excess of £150,000. This amounts to £3,716.72.
The total SDLT due is £1,000.00 + £3,716.72 = £4,716.72.

It should also be appreciated that at the end of year five, a further return must be filed based on the actual NPV of the first five years’ rent.

Conclusion
As you can see the calculations are complex and they do require careful thought and expert advice.

However, the above should be sufficient to enable practitioners to discuss the main issues with their clients and to give them a ‘back of the envelope’ estimate of what the SDLT is likely to be.

The new SDLT regime will produce significantly more tax than the pre 1 December 2003 regime. For example, the tax on a ten year old lease has quadrupled, while the tax on a 25 year lease has increased by a factor of 8! This does seem unduly harsh but for the moment we simply work with what we are given.

Dean Wootten - Managing Director, Online Tutors Ltd

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