If a business tenancy is renewed under LTA 1954, the new lease will often be granted some time after the expiry of the old lease. When that happens, the commencement date may well be backdated to then (or some other date). What about SDLT during that overlap period? The rules are complex and are best explained by an example.

Facts: a business lease (£50,000pa) expired on 31 December 2004.

Eventually a new lease is granted on 1 July 2006.

(1) No rent increase: suppose a new lease is granted at the same rent (£50,000pa), backdated to January 2005:

(a) If the old lease was granted prior to the SDLT regime (ie pre 1 December 2003) the overlap period is disregarded for SDLT purposes (ie no SDLT).

(b) If the old lease was granted under SDLT, it is treated as ‘growing’ under Para 3, Sched 17A. Thus it is taxed as a lease for the original contractual term plus one year. If it continues more than one year beyond the contractual expiry date (as in this example) it is treated as being a lease for the original term plus two years, etc. T must therefore recalculate the net present value of the extended lease; SDLT will then be calculated (with credit being given for the SDLT paid on the original grant).

(2) Rent increase: suppose a new lease is granted at £70,000pa backdated to 1 January 2005:

(a) If the old lease was pre-SDLT regime, and the reason for agreeing the increase was not to obtain the grant of a new lease, the £20,000pa increase is a variation treated for SDLT purposes as the grant of a new lease for 18 months at £20,000pa (this assumes the old lease was granted within the five years immediately preceding 1 January 2005).

(b) If the old lease was granted under stamp duty regime and the reason for agreeing was to obtain the grant of the new lease, the increase is 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 example 1(b)). The £20,000pa increase is a variation treated as the grant of a lease for 18 months at £20,000pa as in 2(a) (once again, assuming that the old lease was 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 £20,000pa increase is treated as a premium for the new lease (ie £30,000 is taxed as a premium, as in 2(b)).

It should also be noted that there is an exception to all of this which applies if the old lease was granted under SDLT, and the new lease was granted on or after 19 July 2006 to begin on or immediately after the contractual expiry of the old lease (eg assume the increase is to £70,000 but the new lease is granted on 31 December 2006). When that happens, 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 NPVs are calculated accordingly. Thus overlap relief would be available to ensure the same amount is not taxed twice (ie in the NPV calculation the rent for the overlap period is reduced by the £50,000 rent paid during holding over).

There is little planning that can be done to simplify the application of these rules. However, if it is more advantageous to avoid the backdated increase being characterised as a premium, one approach might be not to backdate the term and rent commencement (since there would then be no overlap period and none of the permutations would apply). Moreover, remember that Ts 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 lease renewal proceedings are disposed of, whereupon the new lease will commence.

It is then for L to pursue the interim rent. One other point to watch is whether or not the reason for agreeing the increase was to obtain the grant of the new lease. That is a question of fact, with HMRC likely to take the view that the increase was agreed to obtain the grant of the new lease (so it will be taxed as a premium), but there may be scope for setting things up to make the contrary position more convincing.

This note comes from an excellent article by Cobbetts in [2007] The In- House Lawyer December/January p104. © Practical Lawyer