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HELP! Do I need to make a further SDLT return?

28 March 2014

Abolishing the rules on 'abnormal increases' in rent in July 2013 was good news for tenants.

It has lifted the administrative burden of making a further Stamp Duty Land Tax (SDLT) return if the rent was increased abnormally after the first five years of the term.

This could have had a significant impact on leases granted during the recession, as five year rent reviews approach. 

However, tenants should be aware that there are still a number of cases where a further SDLT return is required after the initial grant of a lease, even where the lease has been assigned and no longer vested in the original tenant.

In what circumstances do I need to make a return?

In relation to rent, SDLT is charged on the Net Present Value (NPV) of the rent (plus VAT, if any) over the term of the lease. The NPV represents the current value of the rents to be paid in the future, applying a discount rate (of 3.5%) to the rents payable in each year of the lease. 

Where rent is known for the first five years of the term, whether or not there is any variation in rent for any period after the first five years, the NPV is based on the known rent for the first five years. For each year after year five, the rent is assumed to be the highest annual figure during the first five years. 

The SDLT calculation is, therefore, based on the rent over the first five years of the lease term. If the rent payable in the first five years is not known at the date of grant of the lease, then the SDLT return and payment must be made on the basis of a 'reasonable estimate' of what the rent will be in each of the first five years.

It is for the tenant to make that reasonable estimate and there is little guidance on what is 'reasonable'. 

Rent might be variable, uncertain or contingent in the following circumstances:

  • a rent review falling in first five years (a particular risk if the lease is an underlease, with reviews dictated by the headlease)
  • turnover rent
  • rent increases arising as a result of a formula based on RPI or other index occurring (eg RPI plus 2%) in the first five years (note that if increases are in line with RPI alone, those increases are ignored).

Where a lease is varied to increase the rent before the end of the fifth year and the variation is not provided for in the original lease, the variation is treated as if it were the grant of a new lease in consideration of the additional rent.

Yet another return?

It is well documented that a variation by adding to the physical extent of the premises or increasing the term of the lease takes effect as a surrender and regrant, often triggering the need for a further SDLT return

At the end of the first five years of the lease term or, if earlier, once the actual rent for the first five years has been ascertained, the SDLT calculation must be repeated and if necessary, a further return must be made using the known figures.

At that time, any additional SDLT due (together with interest at the rate of 3%) must be paid. A refund of SDLT can be claimed in the event that SDLT was overpaid.

If, at the end of the first five years, the figures are still unknown, a return is required on an estimated basis, with a further return to follow, once the figures are known. The return would need to be submitted and SDLT paid within 30 days of the earlier of the date on which the rent for the first five years is ascertained or the end of the fifth year.

These rules can impose a significant compliance burden on tenants. Additionally, on the assignment of a lease, these burdens can pass to the assignee, so careful due diligence is needed to obtain the necessary information - enabling the assignee to submit the additional returns and pay the correct amount of SDLT.

This article was written by Louise Ward.

For more information please contact Louise on +44 (0)20 7427 6693 or louise.ward@crsblaw.com