When Do SDLT Obligations Arise?

(SDLT and Leases)

Comment: Understanding when Stamp Duty Land Tax (SDLT) obligations arise is crucial for lease transactions. SDLT rules depend on specific events and deadlines.

Key Points

  • SDLT liability for leases with variable rent requires initial and adjusted returns.
  • SDLT on a new lease arises upon substantial performance or lease execution.
  • SDLT returns must be filed within 14 days of the effective date.
  • Lessees can defer SDLT on uncertain premiums due after six months.
  • SDLT obligations differ for informal occupation, holding over, and lease variations.

Main Principles

  • SDLT liability arises based on specific trigger points, such as the first rent payment or lease execution.
  • Substantial performance determines the effective date for SDLT liability.
  • Returns must be filed and SDLT paid within specific deadlines to avoid penalties.
  • Deferred payments and additional returns may be required based on lease terms and rent determinations.
  • Understanding the legal status of occupancy is essential for SDLT compliance.

Grant of a Lease

(SDLT and Leases>When Do SDLT Obligations Arise?)

➤ SDLT liability for a new lease arises when substantial performance occurs or the lease is executed, with a return due within 14 days.

The concepts of ‘substantial performance’ and ‘effective date’ are crucial in transactions involving leases, with specific ‘trigger points’ applicable. When granting a new lease, several stages may occur at different times, determining SDLT (Stamp Duty Land Tax) liability and return obligations. Here’s a detailed explanation with examples:

Key Trigger Points for SDLT Liability

Substantial Performance and Effective Date:

  • Substantial Performance: Occurs on the earliest of the following (Finance Act 2003, section 44):
    • The first payment of rent being made.
    • Substantially the whole of any consideration other than rent (e.g., a premium) being paid.
    • The tenant taking possession of substantially the whole premises.

Effective Date: Defined as the earlier of:

  • The lease being executed.
  • The agreement for lease being substantially performed.

SDLT Liability and Return Submission

The first SDLT liability and obligation to submit a return arise 14 days (Finance Act 2003, section 76(1)) after the earlier of the lease being executed or the agreement for lease being substantially performed.

Example Scenario: Grant of a Lease

Scenario: On January 1, 2023, Emma and her landlord agree to a lease for a new office space. Several stages mark the lease’s development:

  • Agreement for Lease: Emma and the landlord sign an agreement for lease.
  • Substantial Performance: On March 1, 2023, Emma makes the first rent payment and takes possession of the premises for fitting out.

Triggering Points:

  • First Payment of Rent: Emma makes her first rent payment on March 1, 2023.
  • Tenant Taking Possession: Emma takes possession of the office space on the same date for fitting out.

Since these events occurred, SDLT liability arises from the date of substantial performance, March 1, 2023.

Notional Lease and Effective Date

If an agreement for lease is substantially performed before the lease is granted, it is deemed the grant of a notional lease on the agreement’s terms. The effective date for the notional lease is the date of substantial performance.

Further Steps:

  • Notional Lease: A notional lease is granted on March 1, 2023, the date of substantial performance.
  • Subsequent Real Lease: When the actual lease is later granted, it is also potentially subject to SDLT.

Filing Requirements

14-Day Rule:

  • The requirement to submit the SDLT return within 14 days applies if the effective date of the lease grant is on or after March 1, 2019, or if the lease became notifiable on or after this date.

Example:

  • Effective Date: On March 1, 2023, Emma substantially performs the agreement.
  • Filing Obligation: Emma must submit the SDLT return and pay the due SDLT by March 15, 2023 (14 days from the effective date).

Conclusion

Understanding the specific trigger points for SDLT liability and the concept of substantial performance is crucial when granting leases. Tenants and landlords must be aware of the timing of events such as the first rent payment, the payment of premiums, and taking possession of the premises. Ensuring compliance with the 14-day or 30-day filing requirements based on th

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Deferral of SDLT Payments

(SDLT and Leases>When Do SDLT Obligations Arise?)

➤ Lessees can apply to defer SDLT on uncertain premiums due after six months, but not on uncertain rent, and SDLT is due 14 days after the effective date for leases effective post-March 2019.

Premium Contingency and Deferral

If any part of a premium is contingent or uncertain at the “effective date” and is not payable until more than six months after this date, the lessee can apply to HMRC to defer the payment of an appropriate amount of Stamp Duty Land Tax (SDLT). This is similar to deferral options available for other land transactions.

  • Effective Date Reference: See sections 4.112 and 6.74 for details on determining the effective date.
  • Application for Deferral: Refer to section 8.31 for guidance on applying for SDLT deferral.

Rent and SDLT Deferral

It is important to note that it is not possible to defer the payment of SDLT that arises in respect of rent, even if the amount of rent is uncertain at the effective date. This has implications for when SDLT becomes due:

  • Uncertain Rent: If the final settlement of rent results in an additional SDLT liability, for example, at the end of the first five years of the lease, interest will be charged on this SDLT from the original due date.

Key Dates and Interest Charges

  • Original Due Date: SDLT is typically due 14 days after the effective date of the grant of the lease.
  • Effective Date Post-March 2019: For leases effective on or after 1 March 2019, or for those becoming notifiable on or after this date, the 14-day deadline applies.
  • Effective Date Pre-March 2019: For leases that became notifiable before 1 March 2019, the SDLT deadline was 30 days instead of 14 days.

These rules ensure that lessees are aware of their obligations regarding SDLT payments and the potential for interest charges on deferred amounts, especially in the case of uncertain rent liabilities.

Uncertain or Variable Rent

(SDLT and Leases>When Do SDLT Obligations Arise?)

➤ Lessees can apply to defer SDLT on uncertain premiums due after six months, but not on uncertain rent, and SDLT is due 14 days after the effective date for leases effective post-March 2019.

Initial Rent Determination

The rent for the initial five years of a lease may not be definitively established at the outset. This uncertainty can arise for various reasons:

  • The rent is based on the performance of a business.
  • There is a scheduled rent review within the first five years.

Despite this uncertainty, it is mandatory to submit returns and pay Stamp Duty Land Tax (SDLT) by the required deadline. Any SDLT due must be calculated based on a ‘reasonable estimate’ of the rent, as specified in FA 2003, s 51(2).

Notification of Lease Grant

Notification Thresholds

When the ‘effective date’ of the grant of the lease falls before March 1, 2021, and the lease was notifiable before this date, the land transaction return must be filed, and the tax paid within 30 days of the ‘effective date’ (FA 2003, s 76(1) prior to amendment by FA 2021, s 46(2)).

Changes Effective from March 1, 2021

For leases with an ‘effective date’ on or after March 1, 2021, or those where the ‘effective date’ was before March 1, 2021, but became notifiable on or after this date, the following rules apply:

  • The land transaction return must be filed within 14 days of the ‘effective date’.
  • Any tax due must also be paid within this 14-day period (FA 2003, s 76(1) as amended by FA 2021, s 46(2)).

Key Points to Remember

  • Always use a ‘reasonable estimate’ for calculating SDLT when the rent is uncertain.
  • Be aware of the changes in notification and payment deadlines based on the ‘effective date’ of the lease.
  • Ensure compliance with the revised filing and payment timelines to avoid penalties.

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Notification When Rent for First Five Years of Lease Term is Ascertained

(SDLT and Leases>When Do SDLT Obligations Arise?)

➤ Notify authorities and pay any additional SDLT as soon as the final rent for the first five years is determined or when the fifth year ends, whichever is first.

When entering into a lease agreement, it is important to notify relevant authorities and settle any additional Stamp Duty Land Tax (SDLT) based on the final rent determined for the first five years of the lease. This notification must occur under certain conditions:

Conditions for Notification

Notification and payment of any additional SDLT must occur under the following circumstances:

  1. Rent Finalisation for the First Five Years
    • When the rent for the initial five years of the lease term is finally ascertained.
  2. Reaching the Fifth Year of the Lease Term
    • When the lease reaches the end of its fifth year term, if this occurs before the rent for the first five years is finally determined.

Key Points to Consider

  • Timing of Notification:
    • Notification must take place promptly once the rent for the first five years is finalised or when the fifth year of the lease term concludes, whichever event occurs first.
  • Payment of Additional SDLT:
    • Any additional SDLT that is due as a result of the final rent determination must be paid to ensure compliance with tax regulations.

Example Scenario

Lease Agreement for Office Space

  • Lease Start Date: January 1, 2020
  • Initial Rent Agreement: £50,000 per annum
  • Final Rent Ascertained: December 31, 2024 (Finalised at £55,000 per annum)
  • End of Fifth Year: December 31, 2024

In this scenario:

  • Notification and any additional SDLT payment should be made by December 31, 2024, as this is when the final rent is ascertained and coincides with the end of the fifth year.

Lease Agreement for Retail Space

  • Lease Start Date: June 1, 2019
  • Initial Rent Agreement: £30,000 per annum
  • Final Rent Ascertained: May 31, 2023 (Finalized at £32,000 per annum)
  • End of Fifth Year: May 31, 2024

In this scenario:

  • Notification and additional SDLT payment should be made by May 31, 2023, when the rent for the first five years is finally ascertained, even though the lease has not yet reached the end of its fifth year.

Conclusion

Ensuring timely notification and payment of additional SDLT when the rent for the first five years of a lease is ascertained or upon reaching the end of the fifth year of the lease term is crucial for compliance. This helps in avoiding any penalties or legal complications related to the lease agreement.

Notification and Payment of Revised Rents and SDLT

(SDLT and Leases>When Do SDLT Obligations Arise?)

➤ Notify and pay additional SDLT within 30 days of determining the final rent for the first five years or by the fifth year’s end, whichever comes first, and submit estimates if rent is not finalised.

Effective Date and Notification Requirements

If the ‘effective date’ (refer to sections 4.112 and 6.74) of the lease grant is before April 1, 2020, and the lease grant becomes notifiable before April 1, 2020:

  • The revised rents must be notified.
  • Any additional Stamp Duty Land Tax (SDLT) must be paid within 30 days of the earlier of:
    • The rent for the first five years of the lease term being finally determined.
    • The end of the fifth year of the lease term being reached.
    • (Finance Act 2003, Schedule 17A, paragraph 8(3), prior to amendment by Finance Act 2020, section 46(8)(c)).

Determination of Rent for the First Five Years

The rent for the first five years may not be finally determined by the five-year deadline. For example, it may depend on the profits of a period for which accounts have not yet been finalised. In such cases, it may be necessary to:

  • Submit a further return at the five-year point based on a revised reasonable estimate.
  • Further amend the return once the rent is finally determined.

Relevant Date for Interest on Overdue Tax

Regardless of the situation, the ‘relevant date’ (Finance Act 2003, section 87(3)) for interest on overdue tax purposes remains the ‘effective date’ of the lease grant. Interest will be charged on any SDLT paid more than 30 days after that date:

  • (Finance Act 2003, sections 87(1) and 87(3)(c) prior to the amendments by Finance Act 2020, section 46(7)).

Key Points to Remember

  • Effective Date: Ensure the effective date is accurately recorded.
  • Notification: Revised rents and additional SDLT must be notified and paid within the specified 30-day period.
  • Rent Determination: If rent is not determined by the five-year deadline, submit a reasonable estimate and amend later.
  • Interest on Overdue Tax: Interest charges are based on the effective date, not the notification date.

By adhering to these guidelines, compliance with SDLT regulations and deadlines can be effectively managed.

Effective Date and Lease Notification

(SDLT and Leases>When Do SDLT Obligations Arise?)

➤ Notify HMRC and pay SDLT within 14 days of determining the rent for the first five years or reach the fifth year, making adjustments if final rent isn’t known, to avoid interest on overdue tax.

Key Dates:

  • Effective date of lease grant: On or after 1 July 2021
  • If the lease grant was before 1 July 2021 but became notifiable on or after this date

Circumstances:

  • Notification to HMRC: Deadline for providing revised rent details and paying additional tax depends on whether the lease grant has already been notified to HMRC.

Notifiable Transactions

Newly Notifiable Transactions:

If the revised rents make the transaction notifiable (was not notifiable before), the lessee must:

  • File a return within 14 days of:
    • The rent for the first five years being finally ascertained, or
    • The end of the fifth year of the lease term, whichever is earlier.
  • Reference: Finance Act 2003, Schedule 17A, paragraph 8(3) as amended by Finance Act 2021, section 52(8)(c).

Previously Notified Transactions:

If the lease grant was already notified, but revised rents mean:

  • Tax is now payable (was not payable before), or
  • Additional tax is payable,
  • The lessee must file a further return within 14 days of:
    • The rent for the first five years being finally ascertained, or
    • The end of the fifth year of the lease term, whichever is earlier.
  • Reference: Finance Act 2003, Schedule 17A, paragraph 8(3A) as introduced by Finance Act 2021, section 52(8)(c).

Rent Determination and Tax Payment. Rent Finalisation:

  • Rent for the first five years may not be determined by the five-year deadline.
  • Lessee may need to:
    • Submit a return based on a reasonable estimate.
    • Amend the return once rent is finally determined.

Interest on Overdue Tax:

  • Relevant date for interest on overdue tax is the effective date of lease grant.
  • Interest charged on SDLT paid more than 14 days after this date.
    • Reference: Finance Act 2003, section 87(3) and section 87(1A) as introduced by Finance Act 2021, section 52(7).

SDLT Rates and Bands. Tax Calculation:

SDLT rates and bands used are those in effect as of the effective date of the lease grant.

  • Reference: Finance Act 2003, Schedule 17A, paragraph 8(3B) as introduced by Finance Act 2021, section 52(8)(c).

Return Filing and Self-Assessment. Required Actions:

  • Lessee must deliver:
    • A return under Finance Act 2003, Schedule 17A, paragraph 8(3), or
    • A further return under paragraph 8(3A).
  • Return must include:
    • Self-assessment of the tax chargeable.
    • Payment of tax or additional tax by the return filing deadline.
    • Reference: Finance Act 2003, Schedule 17A, paragraph 8(3B) as introduced by Finance Act 2021, section 52(8)(c).

Timing of Returns and Tax Payments

Scenario:

  • Lessee: John
  • Deadline for initial SDLT return and payment: 20 August 2023
  • Estimated rent: £12,000 per quarter

Process:

  1. John submits an SDLT return by 20 August 2023, estimating the rent.
  2. Actual rent over the first five years is higher than the estimate.
  3. John must submit a further return by 5 September 2028 (30 days after the end of the first five years).
  4. Self-assess the additional SDLT and pay by the same date.
  5. If correct figures are unknown, John must:
    • Submit a reasonable estimate,
    • Correct the return once actual numbers are known.
  6. Any additional SDLT paid after 20 August 2023 incurs interest from that date.

This ensures compliance with the revised tax regulations and timely payment of any additional SDLT due.

Informal Occupation and Holding Over

(SDLT and Leases>When Do SDLT Obligations Arise?)

➤ SDLT obligations in informal occupation or holding over depend on the legal status of the tenancy and must be reassessed annually or as per new lease terms, with specific notification periods.

Overview

Understanding when Stamp Duty Land Tax (SDLT) obligations arise in cases of informal occupation can be challenging. It is important to determine the exact legal nature of the occupation to properly address SDLT responsibilities.

Informal Occupation

  • Legal Nature: Identifying the legal status of the occupation is essential.
  • Periodic Tenancy:
    • Initially considered a lease for one year.
    • SDLT obligations arise 14 days after commencement if the annual rent exceeds the relevant threshold.
    • For tenancies granted before 1 June 2020, the notification period extends to 30 days.
  • Continuous Tenancy:
    • If the tenancy continues beyond the first year, it is treated as a lease for an additional year incrementally (two years, three years, etc.).
    • At the start of each subsequent year, it is necessary to reassess whether the cumulative rent or duration triggers SDLT notification or payment obligations.
    • If triggered, these obligations must be met 14 or 30 days after the beginning of the relevant year, as outlined in section 7.15.

Holding Over

  • Post-Lease Occupation: Sometimes a tenant remains in occupation after the lease ends, known as ‘holding over.’
  • New Lease Negotiation: When a new lease is being negotiated:
    • The SDLT obligations during the holding-over period depend on the terms of the new lease.
    • The precise timing and nature of these obligations can vary based on the new lease provisions (refer to section 7.32 for more details).

Key Points to Remember

  • Establish Legal Nature: Always determine the precise legal status of the occupation.
  • Periodic Tenancy: Treated as a lease for one year initially, with SDLT obligations depending on annual rent.
  • Continuous Tenancy: Reassess SDLT obligations at the start of each new year if the tenancy continues.
  • Holding Over: SDLT obligations during this period depend on the terms of the new lease being negotiated.

By thoroughly understanding and applying these guidelines, you can ensure compliance with SDLT requirements in various tenancy scenarios.

Variation or Surrender of a Lease

(SDLT and Leases>When Do SDLT Obligations Arise?)

➤ For SDLT on lease variation or surrender, notify and pay within 14 days from 1 January 2021 onwards, or 30 days for earlier transactions, based on the transaction’s effective date or “substantial performance.”

Notification and Payment Deadlines for SDLT

When dealing with the variation or surrender of a lease, it is essential to understand the obligations for notifying and paying Stamp Duty Land Tax (SDLT). The rules vary depending on the effective date of the transaction.

Transactions On or After 1 January 2021

For transactions where the effective date is on or after 1 January 2021, or where the transaction only became notifiable on or after this date, the obligations are as follows:

  • Notification and Payment Due Date: 14 days after the earlier of:
    • Completion of the formalities (e.g., the parties executing the relevant document).
    • “Substantial performance” of the variation.

The definition of “substantial performance” can be found in sections 4.112 and 6.74 of the relevant tax legislation.

Transactions Before 1 January 2021

If the effective date of the variation or surrender was before 1 January 2021, and the transaction became notifiable before this date, the obligations differ:

  • Notification and Payment Due Date: 30 days after the earlier of:
    • Completion of the formalities (e.g., the parties executing the relevant document).
    • “Substantial performance” of the variation.

This longer period applies to ensure compliance with the previous regulations before the updated 14-day rule was implemented.

Key Points to Remember

  • Effective Date: The date when the transaction becomes legally binding.
  • Substantial Performance: As defined in specific sections of the tax legislation, indicating a significant level of completion of the transaction.
  • Formalities: Legal procedures or documentation necessary to give effect to the lease variation or surrender.

By adhering to these guidelines, parties involved in the variation or surrender of a lease can ensure they meet their SDLT notification and payment obligations accurately and timely.

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This Article Written By Nick Garner
Founder Stamp Duty Advice Bureau
Author of Stamp Duty Land Tax Guide
For Property Investors.