This leaves a period during which the tenant has been paying rent under the old lease (as continued by the 1954 Act), but which, following grant of the new lease, is expressed to fall within the term of the new lease. How this ‘overlap period’ is dealt with for stamp duty land tax (SDLT) purposes is complex, and varies according to the facts. Scope for tenants to structure matters so as to minimise SDLT liability is limited. What is most advantageous will depend on working through the figures in each instance.

RELEVANT QUESTIONS

The questions that need to be answered, when calculating SDLT on the grant of a renewal lease, will include some or all of the following:

1) Is there an overlap period?

2) Was the old lease granted before or after 1 December 2003 (ie under stamp duty or SDLT)?

3) Is there a rent increase that is backdated so as to apply to the overlap period?

4) Was the old lease granted within the five years immediately preceding the term commencement date of the new lease? (If so, any such backdated rent increase applying to the overlap period is a variation treated for SDLT purposes as the grant of a new lease.)

5) Was the new lease granted before or after 19 July 2006? (If so, there is an exception under the Finance Act 2006 (FA 2006) that may apply.)

6) Was any backdated rent increase applying to the overlap period agreed in order to obtain the grant of the new lease?

EXAMPLE

The relevance of these questions, and the various permutations, are most easily understood by consideration of an example.

Facts

The contractual expiry date of a business lease was 31 December 2004, at which time the rent payable under the lease was £50,000 per annum. The tenancy has continued beyond that date under the 1954 Act, pending negotiation for a new lease, and the tenant continues to pay rent at the rate of £50,000 per annum. If the term of the new lease is to be backdated, there are three possibilities to consider:

1) No rent increase

A new lease is granted on 1 July 2006 at the same rent of £50,000 per annum, from 1 January 2005:

a) If the old lease was granted before 1 December 2003, ie under stamp duty instead of SDLT, the overlap period is disregarded in calculating SDLT on the new lease.

b) If the old lease was granted under SDLT, it is treated as ‘growing’ under Para 3, Sched 17A to the Finance Act 2003 (FA 2003). That is, it is taxed as a lease for the original contractual term plus one year. If it continues more than a year beyond contractual expiry, as it does here, it is treated as being a lease for the original term plus two years, and so on. The tenant must recalculate the net present value (NPV) of the extended lease; the SDLT is calculated, and credit given for SDLT paid on the original grant.

2) Rent increase

A new lease is granted on 1 July 2006 at a rent of £70,000 per annum, from 1 January 2005:

a) If the old lease was granted under stamp duty, and the reason for agreeing the increase was not to obtain the grant of the new lease, the £20,000 per annum increase is a variation treated for SDLT purposes as the grant of a new lease for 18 months at £20,000 per annum (Para 13, Sched 17A, FA 2003). (This is only if the old lease was granted within the five years immediately preceding 1 January 2005, the date of the variation.)

b) If the old lease was granted under stamp duty, and the reason for agreeing the increase was to obtain the grant of the new lease, the increase is treated for SDLT purposes as a premium for the grant of the new lease, ie £30,000 is taxed as premium.

c) If the old lease was granted under SDLT, and the reason for agreeing the increase was not to obtain the grant of the new lease, then the £50,000 rent paid during holding over is taken into account for the new NPV of the ‘growing’ old lease, as in 1(b). The £20,000 per annum increase is a variation treated as the grant of a lease for 18 months at £20,000 per annum, as in 2(a) (again subject to the old lease having been granted within the five years immediately preceding the date of the variation).

d) If the old lease was granted under SDLT, and the reason for agreeing the increase was to obtain the grant of the new lease, then the £50,000 rent paid during holding over is taken into account for the new NPV of the ‘growing’ old lease, as in 1(b) and 2(c). The £20,000 per annum increase is treated as a premium for the new lease, ie £30,000 is taxed as a premium, as in 2(b).

3) Exception under FA 2006

A new lease is granted on 31 December 2006 at a rent of £70,000 per annum, from 1 January 2005:

a) If the old lease was granted under SDLT, and the new lease was granted on or after 19 July 2006, and the new lease is expressed to begin on or immediately after the contractual expiry of the old lease, then (exceptionally) for SDLT purposes the term of the new lease is treated as beginning on the date it is expressed to begin, ie 1 January 2005, and the NPV is calculated accordingly. However, overlap relief is available to ensure the same amount is not taxed twice; so in the NPV calculation, the rent for the overlap period is reduced by the £50,000 rent paid during holding over (Para 9A, Sched 17A, FA 2003).

STRUCTURING RENEWAL TERMS

Because many of these variables are simple questions of fact, such as the date when the old lease was granted, scope for manoeuvre is restricted. However, if it is more advantageous to avoid the backdated increase being characterised as a premium, one approach might be to not backdate the term and rent commencement. There would then be no overlap period, and none of the above permutations would apply.

Tenants should bear in mind that they are under no obligation to agree on a backdated term commencement. If they do not, the statutory position is that the old lease will come to an end three months after the lease renewal proceedings are disposed of, whereupon the new lease will commence (ss33 and 64 of the 1954 Act). It is then for the landlord to pursue the matter of interim rent in respect of the period from contractual to actual expiry of the old lease.

Another variable is whether the reason for agreeing the increase was to obtain the grant of the new lease. This is a question of fact, and so cannot be decided by, for example, an express statement by both parties as to what the reason was. HM Revenue & Customs is likely to take the view that the increase was agreed to obtain the grant of the new lease, so that it will be taxed as a premium, though there may be some scope for setting things up to make the contrary position more convincing.

Of course, SDLT considerations are just one part of a much bigger picture. Nevertheless, the alert tenant may be able to effect savings where other considerations allow it.  © In-House Lawyer