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Stamp Duty Land Tax: Is Your Rent Increase Abnormal?

In December 2003 the old Stamp Duty regime was replaced by Stamp Duty Land Tax (SDLT). The SDLT rules contain anti-avoidance measures which mean that commercial tenants need to be aware that a large rent review increase could give rise to an additional SDLT liability.

The general principle for commercial leases is that SDLT is calculated on the amount of rent payable in the first five years of the term. However, HM Revenue & Customs were concerned that tenants may try to agree a low rent during the first five years in return for a large increase thereafter in order to reduce their SDLT liability. As a result rent increases after five years are not ignored if they are considered to be “abnormal”.

As a general rule of thumb, an increase is abnormal if the rent has doubled (or more) after five years (i.e. it goes up more than 20% per annum). If so, for SDLT purposes, any increase after five years will be treated as the grant of a new lease at a rent equal to the higher figure for the remainder of the term and additional duty becomes payable.

An example:
A lease was granted for ten years on 5th January 2004 at an initial rent of £20,000.00 per annum. SDLT of £163.00 was paid after the lease completed. There was an upwards only rent review on 5th January 2009, which has just been agreed at £50,000.00 per annum. The rent has more than doubled after five years, therefore the increase is abnormal and is treated as the grant of a new lease at £50,000.00 per annum for the remainder of the original term. Additional SDLT of £1,353.00 is payable.

What to do if you are a commercial tenant:

• Make a record of leases granted after November 2003 (including any which have been assigned to you). If the lease was granted before December 2003 then it is an old “Stamp Duty” lease and no action is necessary.
• If there is a rent review after five years and the rent is likely to increase by more than 20% per annum, be aware that additional SDLT may be payable.
• Once the review has been settled, go to HM Revenue & Customs website and use the abnormal rent increase calculator to establish whether any additional duty is due.
• If more SDLT is due, HM Revenue & Customs need to be notified and the additional duty must be paid.

Lastly, HMRC have announced that changes will be made to the SDLT regime in the 2009 budget, so all of this may change in March – watch this space!

If you require any further information on this or any other aspect of retail property, please contact Caroline Sutcliffe of the Retail Property team on caroline.sutcliffe@harveyingram.com or 0116 257 4445.

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