SDLT and Shop Leases Patrick Cannon, 15 Old Square

Agenda ► Rates and computation of SDLT on leases ► Compliance, ‘de-regulation’ and Finance Bill 2008 ► Lease drafting ► Agreements for lease ► Holding over ► Variations ► Leasebacks ► Surrender and re-grant ► Sub-sales and leases ► Developers

Rates of SDLT on Leases ► Premiums: £0 - £125,000/150,000 0%* ► £125,001/150,001 – £250,000 1% ► £250,001 - £500,000 3% ► £500,001+ 4% ► Thresholds: ‘slab’ system £125/150k ► Rent: 1% on total average annual rent slice above £125,000/£150,000 ► * nil rate not available if average rent exceeds £1k

Σ V = 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 SDLT r i now means ‘in respect of year i’ and not ‘in year i’

Calculating the SDLT ► Net present value of rentals in most cases based on rent for first five years only ► A single sum expressed to be payable in respect of both rent and other matters eg service charge, taxed as rent ► Peppercorns not taxed as rent or premium ► Amount payable for period before grant of lease treated as a premium not rent (except for backdated leases) ► Increase in rent not provided for by lease treated as grant of new lease, but only if occurs in first 5 years

Uncertain Rent ► Initially compute for first 5 years assuming contingencies will lead to maximum rent and estimate uncertain amounts ► Assume highest rent in any 12 month period will be rent for year 6 and after – trap with front loaded lease rent ► Make adjustment on earlier of first 5 years rent becoming certain or at year 5 ► If rent still unknown at 5 th anniversary complete return and then do further return when known?

Rent Review in Final Quarter of Year 5 ► Where first rent review occurs on or after 4 years and 9 months from term commencement, no uncertain rent treatment ► Agreement for lease problem – on grant of lease review will be within 4 years and 9 months and so taken into account – deeming needed

Rent Increases ► A rent increase outside terms of lease and done in first 5 years is treated as grant of new lease ► But rent increases after 5 th year are subject to abnormal rent increase rules only ► Increase is abnormal if greater than R x Y 5 R is rent previously taxed, Y is whole years between start date and date new rent payable R is rent previously taxed, Y is whole years between start date and date new rent payable  Non-taxable flat rate increases of 20% per full year now permitted  Stamp duty leases now caught?

Charge on lease premiums when consideration includes rent ► Previously, nil rate band n/a for lease premium if rent exceeded £600 pa and 1% applied ► Since 12 March 2008, for non-residential land the ‘relevant rent’ must be £1000 or more before nil rate band is lost on premium ► ‘relevant rent’ is average annual rent or if different amounts are ascertainable at start take average over period for which highest ascertainable rent is payable

‘De-regulation’ and Leases ► No longer ‘notifiable’ for SDLT: ► Grant for 7 years or more where non-rent consideration is below £40k and annaul rent is below £1k ► Assignment or surrender where original grant was 7 years or more, non-rent consideration for assignment/surrender is below £40k and annual rent is below £1k

‘De-regulation’ continued ► Grant for less than 7 years, or assignment or surrender where term originally for less than 7 years, and ► The chargeable consideration does not exceed ‘zero rate threshold’ ► ie does not consist of or include any amount on which SDLT is charged at 1% or higher or would be charged except for a relief

‘De-regulation’ cont’d ► Where non-notifiable for SDLT then no SDLT returns are needed ► SDLT 60 self-certificate has been abolished ► No plans to redesign LR forms ► Requisitions about why no SDLT 5 accompanies the forms? ► Covering letters?

Tenant’s Obligations Ignored as Consideration ► Tenant’s obligations not taxed if listed in para 10 Sch 17A or SI 2006/875 ► Repair, maintain or insure ► Undertaking to pay charges for services, repairs, maintenance, insurance or management ► Other obligations not affecting open market rent ► Guarantee of rent or tenant obligations ► Penal rent ► Tenant’s liability for costs on grant of new lease under Leasehold Reform Acts ► Tenant’s obligation to bear landlord’s costs for the above ► Obligation to transfer single farm payment scheme entitlements to landlord on termination of lease

Leases, Drafting and SDLT ► ‘Chargeable interest’ = estate, interest, right or power in or over land in the UK or benefit of an obligation, restriction or condition affecting the value of such estate, interest, right or power ► Leases included ► Licences excluded – drafting issues ► Tenancies at will ► Agreements for lease – highly complex treatment

Agreements for Lease ► Substantially performed before lease granted – treated as grant of notional lease ► Grant of lease – surrender of notional lease and ‘overlap’ relief applies to the rent ► ie rent under the lease is reduced by rent under agreement for lease for period from grant of lease to end of term of agreement for lease ► But no relief for any premium ? ► ‘Successive linked leases’ rule disapplied by FA 06

Length of Lease ► From grant to termination ► Ignore periods pre-grant ► Ignore rights to break or renew

Term of a Lease ► Term starts from later of contractual term start date and actual date of grant ie term cannot begin before lease was actually granted: Bradshaw v Pawley [1980] 1 WLR ► A grants a lease on 28/4/08 for 10 years from March 2008 quarter day – the term is 9 years 332 days not 10 years – any ‘rent’ payable from 25/3/08 until 27/4/08 taxed as premium not rent

‘Clarification’ of Holding Over ► Where tenant remains in occupation after contractual date and is granted a new lease of the same premises ► If new lease expressed to start on contractual termination date of old lease then treated as starting on that date, not date of grant despite Bradshaw v Pawley ► But credit for any taxable rent already payable for period between old lease and grant of new lease ► Flaw in the drafting of new para 9A Sch 17A?

Renewals of business tenancies increased rent increased rent old lease holding over period new 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 Leases ► Chargeable ‘land transactions’ ► Surrender and re-grant ie increase in term or change in demised land ► Reduction in term ► Reduction in rent ► Increase in rent ► Other variations for which lessee gives consideration ► Reverse premiums

Impact of SDLT ► Fixed duty of £5 gone on duplicates/counterparts ► Transfers to/between nominees/bare trustees ► Grant of lease to or by a nominee ► Nominees/bare trustees as purchasers: SDLT1

Leasebacks – s57A ► Sale of freehold or grant of head lease ► Leaseback relieved from tax provided: 1. Leaseback is out of superior interest 2. Sale consideration is only the leaseback plus cash or debt 3. No sub-sale/group relief ► Market value issues if no relief: para 5, Sch 4, FA 2003

Surrender and Re-grant ► Surrender and re grant are not be treated as ‘exchanges’: para 16, Sch 17A ► ‘Overlap relief’: taxable rent reduced by amount of rent for unexpired term of surrendered lease (para 9, Sch 17A) ► No ‘overlap credit’ for stamp duty leases

Sub Sales A C B £150 £100

Sub-Sales and Leases ► Assigning an agreement for lease – sub-sale relief disapplied ► Assignment before substantial performance – agreement for lease treated as between landlord and assignee and consideration includes anything given for the assignment ► Assignment after substantial performance – assignment is a separate land transaction and effective date is date of assignment

Sub-sales and Leases ► Example Landlord Tenant A Agreement for lease not performed Tenant B Formal lease granted Cash £10 Assigned Premium £100 Total : £100 + £10 = £110

Agreements for Leases and Developers ► What if developer nominates an investor to take grant of formal lease as per example? SDLT x 3? ► Purchaser/builder agreements – developer claims para10(2) Sch 4 FA 2003 protection ► Need to get formal lease asap or restructure ► Vendor/builder agreements – need for formal lease

Leases and development scenarios ► Typical scenario Freeholder Developer Agreement for lease Occupier Formal leaseCash

SDLT and Shop Leases Patrick Cannon, 15 Old Square