‘Substantial performance’ means:
- payment of at least 90% of the consideration/premium;
- payment of the first rent;
- subletting;
- occupation. Note that this will include occupation under a licence
which occurs on or after the date of the contract or agreement for
lease.
If the transaction involves a transfer of freehold, or the assignment of a
lease, and ‘substantial performance’ occurs before completion, then
that triggers the requirement to notify the transaction, with an ‘effective
date’ of the date of substantial performance. Such SDLT returns can be
submitted online in the normal way, but must give the ‘effective date’ as
the date of ‘substantial performance’. In addition, notification should be
given on completion to Manchester Complex Transactions Unit; that
notification should be sent with a covering letter and a copy of the
original return. The completion return will show the ‘effective date’ as the
‘completion date’ of the transaction.
Different rules apply when dealing with an agreement for the grant of a
lease. If ‘substantial performance’ occurs before the grant of the lease
then that triggers the requirement to notify the transaction – and that is
known as a ‘notional lease’. The ‘effective date’ of the ‘notional lease’
will be the date of ‘substantial performance’. Those returns can be
submitted online in the usual way, but must give the ‘effective date’ as
the date of ‘substantial performance’. If the ‘notional lease’ is notifiable,
then take care in filling in SDLT1 (field 2 = L; field 4 = effective date field
17 = start date of lease as specified in agreement; field 23 = NPV for this lease; field 24 = any premium; field 25 = tax due on NPV). If the
term of the ‘notional lease’ is unknown (eg it is fixed term but the
commencement date is not known) then the ‘notional lease’ will be
treated as one year. If the NPV for the rental element is at the nil rate
and any premium payable is also at the nil rate, the ‘notional lease’ will
not be notifiable (you can use SDLT60 to self-certify). The calculation of
NPV on a ‘notional lease’ will be calculated from the date of ‘substantial
performance’ (not from the start date of the lease, if known). When using
the Stamp Taxes Calculator you enter the ‘effective date’ since the NPV
must be calculated from the date of ‘substantial performance’ of a
‘notional lease’.
When the ‘formal lease’ is subsequently granted in pursuance of the
agreement for lease, the ‘notional lease’ is treated as if it had been
surrendered at that time, and the lease is then seen as a re-grant with
an ‘effective date’ of the lease completion date. On the grant of the
‘formal lease’, overlap relief is available for the overlap period provided
the agreement for lease was subject to SDLT. If there is no additional
premium and/or rent to take into account for the first five years (due to
the overlap relief) then an SDLT60 must be completed. Even if there is
additional rent payable and/or premium, if this falls at the nil rate then
an SDLT60 must be completed.
For a useful summary of this see www.hmrc.gov.uk/so/substantial.htm.
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