News
28 October 2008
Stamp Duty Land Tax on 'Abnormal Rent'
It is the 5th birthday of Stamp Duty Land Tax (SDLT) on 1st December 2008. However, rather than celebrating it, a great many tenants will be bemoaning its introduction at all.
Leases entered into since the birth of SDLT will more than likely be due for rent review and what many tenants will not be aware of is a potential liability to additional SDLT should the increased rent be classed as “abnormal” under the Finance Act 2003.
The abnormal increase provisions apply not only where there is a rent review increase but also from a variation of the lease.
What is classed as abnormal?
‘Abnormal’ is roughly equivalent to an increase greater than 20% per annum, since the most recent previous increase.
As an example:
A new lease was entered into on 1st December 2003 for a term of 10 years from the 1st December 2003.
For the first three years of the term the rent payable was £80,000 and increased to £100,000 until the first review on 25th December 2008.
• The highest rent on which SDLT was originally paid was £100,000 which became payable on 1 December 2006
• 20% of £100,000 = £20,000.
The number of whole years between 1st December 2006 and the rent review date on 25th December 2008 = 3(rounded up).
Therefore, if the rent on review increases by more than £60,000 (which is three times the £20,000), the rent review is classed as abnormal and SDLT has to be paid on the whole of the increased rent (not just on the increase above £60,000).
Who does this affect ?
You may think that this cannot possibly affect you in the present climate.
However, it can still affect where for example:
• You had an initial rent free period; or
• Your rent was stepped up towards the end of the first five years
Please remember this only applies to leases granted on or after 1st December 2003.
If, at the fifth year rent review, the rent increases by an amount that triggers the abnormal rent review, the increase will be treated as though it were the grant of a new lease in consideration of the excess rent for a term of years equal to the unexpired residue of the lease.
What do I need to do?
If this affects you, you must seek advice immediately
HM Revenue & Customs impose a 30 day time limit for notification and payment will operate just as it does for other land transactions. So any delay can result in a penalty charge and interest charges.
Disclaimer
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published.
Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.
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