Potential Stamp Duty Land Tax Trap

Many owners of leasehold commercial properties will be aware that Stamp Duty Land Tax is often payable when you enter into that lease.  Whether Stamp Duty is payable depends on a number of factors including the length of the term and the amount of rent you will pay in the first five years of that term.  There is a complex calculation that provides a net present value upon which it is then assessed whether Stamp Duty Land Tax is paid.

The same applies when you renew your lease and a further assessment is undertaken and any Stamp Duty Land Tax due is then paid on completion of the lease renewal.

The commercial reality is that many lease renewals are not completed immediately following the end of the term of the original lease but this creates a potential pitfall from a Stamp Duty perspective. 

Where a tenant has a lease that is not excluded from the Landlord and Tenant Act 1954 and therefore benefits from statutory renewal rights there is a possibility there will be a “holding over” period following the end of the term of the original lease.  As the lease is protected, it does not immediately come to an end when the contractual term expires.  The holding over period allows the tenant to remain in possession on the terms of the original lease until such time as either party takes action to bring that tenancy to an end which is usually followed by a new lease.

There is however a lesser-known requirement that may require Stamp Duty Land Tax to be paid for that holding over period.  Even if you did not pay Stamp Duty Land Tax on your original lease, the effect of the holding over period may dictate that Stamp Duty is now payable depending on how long that holding over period is for.  There is a requirement that within 30 days of the end of each year that you are holding over an assessment needs to be made as to whether any Stamp Duty Land Tax is payable.  The first hurdle is to establish whether or not a Stamp Duty Land Tax return needs to be filed as this is a requirement on many leases, even if no tax is payable.  If the net present value exceeds £40,000 (which is the case for many leases) a return must be made despite there being no obligation to pay tax until the net present value reaches £150,000.

Once a new lease is completed, or you leave the premises, there is as an obligation to assess and potentially make a further return and pay tax for the part of the year up to the date on which you vacate or enter into a new lease.

From a solicitor’s point of view this can be difficult to monitor as tenants only tend to instruct their solicitor once the terms of a new lease have been agreed.  If this happens to be more than one year after the previous lease ended, then the deadline to make a further return is likely to have been missed.  It is therefore advisable that advice is sought from a solicitor as early as possible in the holding over period so you can be provided with an outline of when action needs to be taken even if a new lease is not agreed for some considerable time after.  This would help to avoid potential penalties and interest that would be imposed by HMRC in the event any deadlines are missed.

A further potential trap exists in relation to leases where there is a rent review within the first five years.  In most cases it is impossible to know for certain what the rent will be when that review takes place so a reasonable estimate will be made by your solicitor when the lease is entered into.

When the rent review is eventually determined it will inevitably be less or more than the estimated figure.  It is therefore necessary to make a further assessment of the net present value and pay any additional tax due.  Some good news however is that if the rent review is less than the estimated figure you would be able to reclaim some tax from HMRC if tax was payable when the lease was originally granted.

In the case of holding over periods and rent reviews, we recommend early advice is obtained from a solicitor.  Our commercial property specialists are ready to discuss these issues and calculate your potential liabilities when the event arises.

By contacting our new enquiries team on 01474546013 or emailing us at enquiries@martintolhurst.co.uk you can then be provided with access to one of our commercial property specialists to discuss these complex matters and other issues relating to your commercial tenancy.