On the grant of a lease of commercial property in England and Northern Ireland, Stamp Duty Land Tax (SDLT) is payable on any premium and rent.
In the case of rent, SDLT is charged on the Net Present Value (NPV) of the rent payable over the term of the lease. SDLT is not payable on the rent if the NPV is less than £150,000. HMRC provides an online calculator which calculates the NPV and the SDLT based on the following thresholds:
|Net Present Value of rent||SDLT rate|
|£0 to £150,000||Zero|
|The portion from £150,001 to £5,000,000||1%|
|The portion above £5,000,000||2%|
There are numerous types of SDLT reliefs available, most of which involve complex conditions and stringent anti-avoidance provisions. Overlap relief may be available where a tenant surrenders an existing lease and in consideration of that surrender, enters into a new lease of the same or substantially the same premises with an overlapping period.
Rather than incur an additional SDLT liability for the period of overlap, for the purposes of the SDLT calculation, any rent payable under the new lease for the overlapping period is reduced by the rent previously payable and declared for this period.
A tenant enters into a lease on 1st January 2012 for a ten-year term commencing on 1st January 2012 with an annual rent of £100,000. On 1st January 2019, this lease is surrendered and the tenant enters into a new ten-year lease of the same premises commencing on 1st January 2019 for an increased annual rent of £120,000.
The overlap period is 3 years – 1st January 2019 to 31st December 2021.
When calculating the SDLT liability for the new lease, overlap relief will be available for the 3 year period above. The rent for years 1-3 will, therefore, be £20,000 for the purposes of the new SDLT calculation (£120,000-£100,000).
The total tax due on the new lease if overlap relief was not available would be £9,301. This would be reduced by £2,801 when claiming overlap relief.
This is a simple example and does not take into account rent-free periods, VAT and uncertain rents (for example due to rent reviews).
Certain conditions must be met to qualify for overlap relief:
- The old lease must have been granted under the SDLT regime and not the former stamp duty regime;
- The premises under the old and new leases must be “substantially the same premises”. HMRC does not provide a definition of what is “substantially the same”, but confirms that relief is available where the new lease includes additional floors of the same building.
If in doubt, it is possible to apply to HMRC for clearance on this point. The application should be made at an early stage of the transaction to ensure that the advice is received prior to completion;
Overlap relief can also apply where a tenant renews a lease and SDLT is due under the new lease for a period which overlaps with a period of holding over for which a “growing lease” return was submitted.
A tenant enters into a lease on 1st January 2013 for a five year term commencing on 1st January 2013 with an annual rent of £100,000. On expiry of the term, the tenant remains in occupation. This period of holding over is initially treated as an extension of the original lease by one year and additional SDLT may be due. On 1st January 2019, the tenant enters into a new lease of the same premises which is backdated to the expiry of the old term (1st January 2018) for an increased annual rent of £120,000.
The overlap period is 1 year – 1st January 2018 to 31st December 2018.
When calculating its SDLT liability for the new lease, overlap relief will be available for the 1 year period above. The rent for year 1 will therefore be £20,000 for the purposes of the new SDLT calculation (£120,000-£100,000) provided the rent has been taken into account in respect of paying SDLT in the holdover period.
Other Points to Note
Overlap relief cannot reduce the rent payable under the new lease to a negative amount – e.g. the amount of rent used in any calculation cannot be less than nil.
- If VAT is payable on the rent, the SDLT is calculated on the VAT inclusive rent.
- The time limit for submitting the SDLT return has recently been reduced from 30 to 14 days from the completion date.
BHW’s Commercial Property Department regularly advises on the leasing of commercial premises and SDLT Overlap relief. For more information, call 0116 289 7000 or email firstname.lastname@example.org.