Tax charge on rent hikes
From 1 December 2008 unusually large rent increases on some leases may for the first time be liable to a new stamp duty land tax (SDLT) charge.
Background
Where there is an abnormal rent increase after the end of the fifth year of a lease then a further charge to SDLT arises. The SDLT legislation came into force from 1 December 2003. The rule therefore can start to apply from December this year.
“Abnormal” means in effect an annual rent increase of more than 5% in excess of the retail price index.
The purpose of the rule was to prevent tax planning that would save paying any SDLT on the grant of a lease by, for example, providing for a five year rent holiday with a rent review to six times market rent in year six and market rent thereafter.
The Tax Charge
The charge applies, however, in every situation where the rent increases by more than 5% over RPI per year, even where there is no attempt to avoid tax, where the lease has been in place at least 5 years from 1 December 2003. In practice, this may be less common than it first appears, since a year on year increase of more than 5% plus RPI adds up to a substantial rise over five years. Nonetheless, the charge may be triggered where, for example:
• Rent is linked to the turnover of a business that has a good year;
• Redevelopment in the area means that local rents rise relatively steeply relative to rises elsewhere.
Since it is the responsibility of the tenant to pay any additional tax charge, the landlord is unlikely to be concerned about the risk.
It is worth bearing in mind that this is not the only way that a rent increase in the first five years, or at any other time, can give rise to a liability to submit a further return and pay more tax. This can happen where there is a rent increase that the lease does not provide for. It can also happen where rent that was uncertain or contingent becomes known later.
Old Leases
Leases granted before December 2003 are generally not subject to SDLT unless varied, so advice should be taken before making any changes to them.
For further information please contact
Bob Neal in our Taxation Services Team at our Nottingham office:
Freeth Cartwright LLP, Cumberland Court, 80 Mount Street, Nottingham NG1 6HH
Tel: 0115 901 5599
Fax: 0115 859 9619
Email: bob.neal@freethcartwright.co.uk
Mike Gilbert in our Taxation Services Team at our Nottingham office:
Freeth Cartwright LLP, Cumberland Court, 80 Mount Street, Nottingham NG1 6HH
Tel: 0115 934 3903
Fax: 0115 859 9619
Email: mike.gilbert@freethcartwright.co.uk
The information contained in this document is a general summary and commentary on recent legal developments and does not constitute advice. You must always take specific legal advice in relation to any of the issues raised in this document in terms of the impact they may have upon any matter in which you are involved.