Ask the team: SDLT and holding over

The SDLT and stamp duty implications of:

  • Holding over a business lease under the Landlord and Tenant Act 1954.
  • Granting a renewal lease.
  • Extending the term of the original lease.
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Question

My client has a business lease that is protected under the Landlord and Tenant Act 1954 (LTA 1954). The fixed term has expired, and my client is currently holding over and remains in occupation. The landlord has indicated that it is prepared to grant a new lease and backdate it to the day after expiry of the original lease. I am not sure when the original lease was granted.

Please can you explain the stamp duty land tax (SDLT) and stamp duty implications of each of the following:

  • Holding over.

  • Entering into a renewal lease and backdating the term to the day after the term of the original lease.

  • Extending the term of the original lease.

 

Answer

Is the original lease a stamp duty or SDLT lease?

Generally, a lease granted on or after 1 December 2003 is an SDLT lease. However, subject to certain exceptions (such as a variation of the lease on or after 11 July 2003), a lease granted on or after 1 December 2003 will be a stamp duty lease if it is granted pursuant to an agreement for lease entered into before 11 July 2003.

For more information, see Practice note, Stamp duty land tax: Commencement and implementation: Contracts (www.practicallaw.com/0-107-3726).

Holding over

Where the original lease is a stamp duty lease

Where the original lease was subject to stamp duty (a stamp duty lease), holding over of the lease under the LTA 1954 should not trigger liability for the tenant to pay stamp duty or SDLT. However, if other variations to the lease occur, such as a variation increasing the rent, there may be SDLT consequences for the tenant.

For more information, see:

Where the original lease is an SDLT lease

By contrast, where the original lease is an SDLT lease, the holding over period is treated as an extension of the original lease (turning it into a "growing lease", initially of one year) until the new lease is granted or the lease is determined. It is necessary to recalculate the net present value (NPV) at the beginning of every year of holding over and pay any (or further) SDLT due (paragraph 3, Schedule 17A, Finance Act 2003 (FA 2003)).

If further SDLT is due or SDLT becomes due where none was due before, the tenant must submit a return (by way of a letter sent to the Birmingham Stamp Office) and pay the additional SDLT at the rate applicable as at the date of extension of the lease, both within 30 days of the day after expiry of the original lease (paragraph SDLTM14100: Term of a lease: Holding over (www.practicallaw.com/5-502-8789)).

Entering into a renewal lease

Where the original lease is a stamp duty lease

If the tenant is granted a renewal lease, the term for SDLT purposes starts on the later of the following:

  • Term commencement date.

  • Date of grant.

(Bradshaw v Pawley [1980] 1WLR 10.)

If the rent for the holdover period exceeds the passing rent under the original lease, then the uplift will only be taxed where the increased rent is payable in consideration of the grant of the renewal lease. In such cases, the uplift is treated as a premium, and the tenant is liable to pay SDLT on that premium (see Practice note, SDLT and the grant of a lease: Leases granted with a mixture of premium and rent as consideration (www.practicallaw.com/8-107-4821)).

Where the original lease is an SDLT lease

If the original lease was an SDLT lease and the renewal lease is granted on or after 19 July 2006, the rule in Bradshaw v Pawley is disapplied provided that all of the following apply:

  • The tenant continues in occupation beyond the expiry of the term of the original lease.

  • The landlord grants a renewal lease of the same or substantially the same property.

  • The contractual term of the new lease is backdated to the day after the end of the term of the original lease.

(Paragraph 9A, Schedule 17A, FA 2003 (statutory disapplication)).

The effect of the disapplication of the rule in Bradshaw v Pawley is that the term of the new lease is treated for SDLT purposes as commencing on the term commencement date, rather than the date of actual grant. Overlap relief is available for the period between the term commencement date and the date of grant. In calculating the SDLT on the new lease, the rent is reduced by the amount of rent payable under the growing lease in respect of the holdover period.

You need to consider whether the transactions are linked for SDLT purposes. The effect of linking is that the chargeable consideration for the original and new leases is aggregated for the purpose of applying SDLT rates and thresholds.

HMRC's SDLT manual states that a renewal lease will be treated as being linked with the original lease where the rent is fixed under the terms of the original lease or is stated to be the same as that payable under the original lease (paragraph SDLTM17035: Miscellaneous Provisions: Linked leases: Overview).

However, the renewal of a lease will not be treated as linked with the original lease if it can be shown to have been negotiated at arm's length or renewed following entirely new negotiations.

For more information, see:

Extending the term of the original lease

If a stamp duty lease or SDLT lease is varied to extend the term of the lease, the variation takes effect as a surrender and regrant (Friends Provident Life Office v British Railways Board [1995] 48 EG 106). Note that a surrender and regrant could have unintended and undesirable landlord and tenant implications. For more information, see:

Where the original lease is a stamp duty lease

The tenant will be liable to pay SDLT on the NPV of the new lease. It will not be entitled to a refund of the stamp duty that it paid on the original stamp duty lease.

Where the original lease is an SDLT lease

If the original lease was an SDLT lease, subject to certain conditions being met, overlap relief will be available and this will reduce the amount of SDLT payable under the new lease (paragraph 9, Schedule 17A, FA 2003). The SDLT calculation would take into account the rent that would have been payable under the surrendered (original) lease for the period between the date of grant of the new lease and the expiration of the term of the surrendered lease, had it not been surrendered. This relief only applies where the original lease is an SDLT lease and is not available where the original lease is a stamp duty lease.

For further information, see Practice note, Lease surrenders: Surrenders and regrants (www.practicallaw.com/8-107-4034).

 

Further information

Practice notes

Drafting note

Deed of variation drafting note (www.practicallaw.com/0-201-1676).

HMRC's SDLT manual

 

Comment

If you have any comments on this answer we would very much like to hear from you. Please send an e-mail to property.feedback@practicallaw.com.

 
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