SDLT and Shop LeasesSDLT and Shop Leases

Patrick Cannon, 15 Old SquarePatrick Cannon, 15 Old Squarewww.patrickcannon.netwww.patrickcannon.net

AgendaAgenda

► Rates and computation of SDLT on leasesRates and computation of SDLT on leases► Compliance, ‘de-regulation’ and Finance Bill Compliance, ‘de-regulation’ and Finance Bill

20082008► Lease draftingLease drafting► Agreements for leaseAgreements for lease► Holding overHolding over► VariationsVariations► LeasebacksLeasebacks► Surrender and re-grantSurrender and re-grant► Sub-sales and leasesSub-sales and leases► DevelopersDevelopers

Rates of SDLT on LeasesRates of SDLT on Leases

► Premiums: £0 - £125,000/150,000 0%*Premiums: £0 - £125,000/150,000 0%*► £125,001/150,001 – £250,000 1%£125,001/150,001 – £250,000 1%► £250,001 - £500,000 3%£250,001 - £500,000 3%► £500,001+ 4%£500,001+ 4%► Thresholds: ‘slab’ system £125/150kThresholds: ‘slab’ system £125/150k► Rent: 1% on total average annual rent slice Rent: 1% on total average annual rent slice

above £125,000/£150,000above £125,000/£150,000► * nil rate not available if average rent exceeds * nil rate not available if average rent exceeds

£1k£1k

ΣV =

n

i = 1

r i

(1 + T) i

• Lease rentals above nil rate band subject to flat rate 1% charge on net present value of total rents payable after discount at 3.5% p.a.

Discounting Formula :

Rents and SDLTRents and SDLT

r i now means ‘in respect of year i’ and not ‘in year i’

Calculating the SDLTCalculating the SDLT► Net present value of rentals in most cases Net present value of rentals in most cases

based on rent for first five years onlybased on rent for first five years only► A single sum expressed to be payable in A single sum expressed to be payable in

respect of both rent and other matters eg respect of both rent and other matters eg service charge, taxed as rentservice charge, taxed as rent

► Peppercorns not taxed as rent or premiumPeppercorns not taxed as rent or premium► Amount payable for period before grant of Amount payable for period before grant of

lease treated as a premium not rent lease treated as a premium not rent (except for backdated leases)(except for backdated leases)

► Increase in rent not provided for by lease Increase in rent not provided for by lease treated as grant of new lease, but only if treated as grant of new lease, but only if occurs in first 5 yearsoccurs in first 5 years

Uncertain RentUncertain Rent

► Initially compute for first 5 years assuming Initially compute for first 5 years assuming contingencies will lead to maximum rent contingencies will lead to maximum rent and estimate uncertain amountsand estimate uncertain amounts

► Assume highest rent in any 12 month period Assume highest rent in any 12 month period will be rent for year 6 and after – trap with will be rent for year 6 and after – trap with front loaded lease rentfront loaded lease rent

► Make adjustment on earlier of first 5 years Make adjustment on earlier of first 5 years rent becoming certain or at year 5rent becoming certain or at year 5

► If rent still unknown at 5If rent still unknown at 5thth anniversary anniversary complete return and then do further return complete return and then do further return when known?when known?

Rent Review in Final Quarter of Rent Review in Final Quarter of Year 5Year 5

►Where first rent review occurs on or Where first rent review occurs on or after 4 years and 9 months from term after 4 years and 9 months from term commencement, no uncertain rent commencement, no uncertain rent treatmenttreatment

►Agreement for lease problem – on Agreement for lease problem – on grant of lease review will be within 4 grant of lease review will be within 4 years and 9 months and so taken into years and 9 months and so taken into account – deeming neededaccount – deeming needed

Rent Increases Rent Increases ► A rent increase outside terms of lease and A rent increase outside terms of lease and

done in first 5 years is treated as grant of new done in first 5 years is treated as grant of new leaselease

► But rent increases after 5But rent increases after 5thth year are subject to year are subject to abnormal rent increase rules onlyabnormal rent increase rules only

► Increase is abnormal if greater than Increase is abnormal if greater than R x YR x Y

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R is rent previously taxed, Y is whole years R is rent previously taxed, Y is whole years between start date and date new rent between start date and date new rent payablepayable

Non-taxable flat rate increases of 20% per full Non-taxable flat rate increases of 20% per full year now permittedyear now permitted

Stamp duty leases now caught?Stamp duty leases now caught?

Charge on lease premiums Charge on lease premiums when consideration includes when consideration includes

rentrent► Previously, nil rate band n/a for lease Previously, nil rate band n/a for lease

premium if rent exceeded £600 pa and 1% premium if rent exceeded £600 pa and 1% appliedapplied

► Since 12 March 2008, for non-residential Since 12 March 2008, for non-residential land the ‘relevant rent’ must be £1000 or land the ‘relevant rent’ must be £1000 or more before nil rate band is lost on premiummore before nil rate band is lost on premium

► ‘‘relevant rent’ is average annual rent or if relevant rent’ is average annual rent or if different amounts are ascertainable at start different amounts are ascertainable at start take average over period for which highest take average over period for which highest ascertainable rent is payableascertainable rent is payable

‘‘De-regulation’ and LeasesDe-regulation’ and Leases

►No longer ‘notifiable’ for SDLT:No longer ‘notifiable’ for SDLT:►Grant for 7 years or more where non-Grant for 7 years or more where non-

rent consideration is below £40k and rent consideration is below £40k and annaul rent is below £1kannaul rent is below £1k

►Assignment or surrender where original Assignment or surrender where original grant was 7 years or more, non-rent grant was 7 years or more, non-rent consideration for assignment/surrender consideration for assignment/surrender is below £40k and annual rent is below is below £40k and annual rent is below £1k£1k

‘‘De-regulation’ continuedDe-regulation’ continued

►Grant for less than 7 years, or Grant for less than 7 years, or assignment or surrender where term assignment or surrender where term originally for less than 7 years, and originally for less than 7 years, and

►The chargeable consideration does not The chargeable consideration does not exceed ‘zero rate threshold’exceed ‘zero rate threshold’

► ie does not consist of or include any ie does not consist of or include any amount on which SDLT is charged at amount on which SDLT is charged at 1% or higher or would be charged 1% or higher or would be charged except for a reliefexcept for a relief

‘‘De-regulation’ cont’dDe-regulation’ cont’d

►Where non-notifiable for SDLT then no Where non-notifiable for SDLT then no SDLT returns are needed SDLT returns are needed

►SDLT 60 self-certificate has been SDLT 60 self-certificate has been abolishedabolished

►No plans to redesign LR formsNo plans to redesign LR forms►Requisitions about why no SDLT 5 Requisitions about why no SDLT 5

accompanies the forms?accompanies the forms?►Covering letters?Covering letters?

Tenant’s Obligations Ignored as Tenant’s Obligations Ignored as ConsiderationConsideration

► Tenant’s obligations not taxed if listed in para 10 Sch Tenant’s obligations not taxed if listed in para 10 Sch 17A or SI 2006/875 17A or SI 2006/875

► Repair, maintain or insureRepair, maintain or insure► Undertaking to pay charges for services, repairs, Undertaking to pay charges for services, repairs,

maintenance, insurance or managementmaintenance, insurance or management► Other obligations not affecting open market rentOther obligations not affecting open market rent► Guarantee of rent or tenant obligationsGuarantee of rent or tenant obligations► Penal rentPenal rent► Tenant’s liability for costs on grant of new lease Tenant’s liability for costs on grant of new lease

under Leasehold Reform Actsunder Leasehold Reform Acts► Tenant’s obligation to bear landlord’s costs for the Tenant’s obligation to bear landlord’s costs for the

aboveabove► Obligation to transfer single farm payment scheme Obligation to transfer single farm payment scheme

entitlements to landlord on termination of leaseentitlements to landlord on termination of lease

Leases, Drafting and SDLTLeases, Drafting and SDLT

► ‘‘Chargeable interest’ = estate, interest, right Chargeable interest’ = estate, interest, right or power in or over land in the UK or benefit or power in or over land in the UK or benefit of an obligation, restriction or condition of an obligation, restriction or condition affecting the value of such estate, interest, affecting the value of such estate, interest, right or powerright or power

► Leases includedLeases included► Licences excluded – drafting issuesLicences excluded – drafting issues► Tenancies at willTenancies at will► Agreements for lease – highly complex Agreements for lease – highly complex

treatment treatment

Agreements for LeaseAgreements for Lease

► Substantially performed before lease granted – Substantially performed before lease granted – treated as grant of notional leasetreated as grant of notional lease

► Grant of lease – surrender of notional lease and Grant of lease – surrender of notional lease and ‘overlap’ relief applies to the rent‘overlap’ relief applies to the rent

► ie rent under the lease is reduced by rent under ie rent under the lease is reduced by rent under agreement for lease for period from grant of agreement for lease for period from grant of lease to end of term of agreement for leaselease to end of term of agreement for lease

► But no relief for any premium ?But no relief for any premium ?► ‘‘Successive linked leases’ rule disapplied by FA Successive linked leases’ rule disapplied by FA

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Length of LeaseLength of Lease

►From From grantgrant to termination to termination► Ignore periods pre-grantIgnore periods pre-grant► Ignore rights to break or renewIgnore rights to break or renew

Term of a LeaseTerm of a Lease

►Term starts from later of contractual Term starts from later of contractual term start date and actual date of grant term start date and actual date of grant ie term cannot begin before lease was ie term cannot begin before lease was actually granted: actually granted: Bradshaw v Pawley Bradshaw v Pawley [1980] 1 WLR[1980] 1 WLR

►A grants a lease on 28/4/08 for 10 A grants a lease on 28/4/08 for 10 years from March 2008 quarter day – years from March 2008 quarter day – the term is 9 years 332 days not 10 the term is 9 years 332 days not 10 years – any ‘rent’ payable from 25/3/08 years – any ‘rent’ payable from 25/3/08 until 27/4/08 taxed as premium not rentuntil 27/4/08 taxed as premium not rent

‘‘Clarification’ of Holding OverClarification’ of Holding Over

► Where tenant remains in occupation after Where tenant remains in occupation after contractual date and is granted a new lease contractual date and is granted a new lease of the same premisesof the same premises

► If new lease expressed to start on If new lease expressed to start on contractual termination date of old lease contractual termination date of old lease then treated as starting on that date, not then treated as starting on that date, not date of grant despite date of grant despite Bradshaw v PawleyBradshaw v Pawley

► But credit for any taxable rent already But credit for any taxable rent already payable for period between old lease and payable for period between old lease and grant of new leasegrant of new lease

► Flaw in the drafting of new para 9A Sch 17A? Flaw in the drafting of new para 9A Sch 17A?

Renewals of business Renewals of business tenanciestenancies

increased rentincreased rent

old lease holding over period new old lease holding over period new lease lease

• Position on holding over• Deemed new lease rule disapplied if rent increase is after year 5 and not ‘abnormal’ so rent increase can escape tax• New lease expressed to start from end of old lease – do not reserve rent for holding over period

Variations of LeasesVariations of Leases

►Chargeable ‘land transactions’Chargeable ‘land transactions’►Surrender and re-grant ie increase in Surrender and re-grant ie increase in

term or change in demised landterm or change in demised land►Reduction in termReduction in term►Reduction in rentReduction in rent► Increase in rentIncrease in rent►Other variations for which lessee gives Other variations for which lessee gives

considerationconsideration►Reverse premiumsReverse premiums

Impact of SDLT Impact of SDLT

►Fixed duty of £5 gone on Fixed duty of £5 gone on duplicates/counterpartsduplicates/counterparts

►Transfers to/between nominees/bare Transfers to/between nominees/bare trusteestrustees

►Grant of lease to or by a nomineeGrant of lease to or by a nominee►Nominees/bare trustees as Nominees/bare trustees as

purchasers: SDLT1purchasers: SDLT1

Leasebacks – s57ALeasebacks – s57A

► Sale of freehold or grant of head Sale of freehold or grant of head lease lease

► Leaseback relieved from tax Leaseback relieved from tax provided:provided:

1.1. Leaseback is out of superior interest Leaseback is out of superior interest

2.2. Sale consideration is only the Sale consideration is only the leaseback plus cash or debt leaseback plus cash or debt

3.3. No sub-sale/group reliefNo sub-sale/group relief► Market value issues if no relief: para Market value issues if no relief: para

5, Sch 4, FA 2003 5, Sch 4, FA 2003

Surrender and Re-grant Surrender and Re-grant

►Surrender and re grant are Surrender and re grant are notnot be be treated as ‘exchanges’: para 16, Sch treated as ‘exchanges’: para 16, Sch 17A17A

► ‘‘Overlap relief’: taxable rent reduced by Overlap relief’: taxable rent reduced by amount of rent for unexpired term of amount of rent for unexpired term of surrendered lease (para 9, Sch 17A)surrendered lease (para 9, Sch 17A)

►No ‘overlap credit’ for stamp duty No ‘overlap credit’ for stamp duty leasesleases

Sub SalesSub Sales

A

C

B £150

£100

Sub-Sales and LeasesSub-Sales and Leases

►Assigning an agreement for lease – sub-Assigning an agreement for lease – sub-sale relief disappliedsale relief disapplied

►Assignment before substantial Assignment before substantial performance – agreement for lease treated performance – agreement for lease treated as between landlord and assignee and as between landlord and assignee and consideration includes anything given for consideration includes anything given for the assignmentthe assignment

►Assignment after substantial performance Assignment after substantial performance – assignment is a separate land – assignment is a separate land transaction and effective date is date of transaction and effective date is date of assignmentassignment

Sub-sales and LeasesSub-sales and Leases►ExampleExample

LandlordTenant A

Agreement for lease not performed

Tenant B

Formal lease grantedCash £10 Assigned

Premium £100

Total : £100 + £10 = £110

Agreements for Leases and Agreements for Leases and DevelopersDevelopers

►What if developer nominates an investor to What if developer nominates an investor to take grant of formal lease as per example? take grant of formal lease as per example? SDLT x 3?SDLT x 3?

►Purchaser/builder agreements – developer Purchaser/builder agreements – developer claims para10(2) Sch 4 FA 2003 protectionclaims para10(2) Sch 4 FA 2003 protection

►Need to get formal lease asap or Need to get formal lease asap or restructurerestructure

►Vendor/builder agreements – need for Vendor/builder agreements – need for formal leaseformal lease

Leases and development Leases and development scenariosscenarios

►Typical scenarioTypical scenario

FreeholderDeveloper

Agreement for lease

Occupier

Formal lease Cash

Cash

SDLT and Shop LeasesSDLT and Shop Leases

Patrick Cannon, 15 Old SquarePatrick Cannon, 15 Old Squarewww.patrickcannon.netwww.patrickcannon.net