Welcome to the fourth of our newsletters designed to provide guidance on the introduction of Stamp Duty Land Tax on 1 December 2003. This issue focuses on the new lease duty provisions.
Further newsletters will follow on other aspects of the changes.
1-
Technical Note on amendments to Stamp Duty Land Tax as applied to leases
(1)
In presenting his 2003 Budget, the Chancellor promised that further consultation with interested parties would continue in connection with the Stamp Duty Land Tax charge on leases. Following this consultation, an announcement has been made about the changes to be implemented to Schedule 5, Finance Act 2003 (which deals with the Stamp Duty Land Tax treatment of leases) for 1 December 2003.
(2)
This note gives further detail about the technical amendments which are proposed and which will be debated before implementation. These will have the effect of
removing uncertainty in the treatment of some leases
keeping the compliance burden to a minimum and
ensuring that taxpayers know what duty they will have to pay.
The amendments are:-
2-
1) Post 5 year rent changes
(1)
Currently, where rent changes are known and included in the terms of a lease from the outset, they are fully taken into account in calculating the Net Present Value (NPV) of the lease (unless they are increases only to reflect RPI). However, where rent changes are made, after two years, to reflect market rents, these changes are ignored for the purposes of calculating the NPV.
(2)
The proposals wish to remove this disparity of treatment. Therefore, it is proposed that all rent changes after 5 years are ignored for the purposes of the NPV calculation and, for rental due after 5 years, the highest rent paid in any previous period of 12 months is substituted and used in the calculation. This will provide comparability of treatment for these types of lease.
3-
2) Leases with uncertain rent
(1)
Where rent is expressed as relating to turnover, or where there are rent sharing or similar measures in place, the lessee is required to make a reasonable estimate of the rent due and include this estimate in their land transaction return. When any part of this estimated rent is determined, they must make an amended return including that part of the rent which is now determined. Representations have been received that this could place a severe compliance burden on many small businesses whose rent is determined by monthly turnover.
(2)
To simplify this area, it is proposed to amend Finance Act 2003 so that, where a lease has a rent which is still uncertain after five years (e.g. a turnover based lease for 15 years), one and only one additional return is required at the five year point. This return will base the NPV on the actual rent paid in the first five years and (for any post five year rent due) will apply the amendment at (1) above i.e. the highest rent paid in any 12 month period over the previous five years will be used in the NPV calculation.
(3)
Where all the uncertainty in the rental of a lease is determined before five years, one and only one additionally return is required at that point.
(4)
These measures will provide certainty and substantially reduce the compliance burden for small businesses.
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3) Contingencies
Amendments will be made to clarify that break and forfeiture clauses in a lease do not operate to artificially shorten the term of a lease in the NPV calculation. Similarly, options to renew, contained in the lease, will not be treated as a contingency extending the term of a lease.
5-
Anti Avoidance
To prevent avoidance of Stamp Duty Land Tax using these amendments, it is proposed that, after the five year point when rent changes are not taken into account in the NPV, if the rent rises by more than 5% + RPI annually, this rent increase is deemed to be the grant of a new lease in a similar way to the way Paragraph 10 Schedule 5 already treats rent increases not included in the terms of a lease. Currently, assignments of leases where the payment of a premium is not involved are Stamp Duty Land Tax transactions but the assumption of the obligation to pay rent is not treated as consideration. Therefore, no duty is paid on these type assignments. It is proposed to change this treatment in a limited variety of circumstances. Where the lease, at the previous transaction, benefited from a relief, so that the duty payable was reduced or eliminated, assignment of such a lease will be deemed to be the grant of a lease by the assignor to the assignee. This will prevent the use of reliefs to avoid Stamp Duty Land Tax.
6-
New Stamp Duty Land Tax return forms
The new returns are currently being printed and will be available from the Inland Revenue orderline 0845 3021472 from 17 November.
7-
Starter Packs
To provide extra help for you at the start of Stamp Duty Land Tax, we shall be sending a “starter pack” to all Solicitors who are currently detailed on our customer database. These packs will contain a small initial supply of returns as follows:
SDLT 1
SDLT 2,3 & 4’s
SDLT 6
Examples -of a correctly completed residential and non-residential return (Further details regarding the returns are detailed below) Licensed Conveyancers will receive their packs through the Council for Licensed Conveyancers.
This initial supply should reach recipients by 24 November and is aimed at ensuring that everyone who needs forms will have an initial working supply for the start of Stamp Duty Land Tax. Quite separately, you should also order your bulk supply through the orderline.
Given that demand is likely to be high, the orderline will be very busy, but everyone who places an order will receive their bulk supplies. In the meantime, you may find the starter pack ensures you have an initial supply to be getting on with. Local Stamp Offices will also receive small stocks of the returns at this time. So if for any reason you find yourself without returns and need some urgently, you can collect them from local offices. Whilst they will be pleased to supply returns to personal callers, please note they will not have sufficient stock nor the facilities to mail the returns to you.
8-
VIEW THE RETURNS AND GUIDANCE NOTES ON OUR WEBSITE
(1)
In the meantime the returns and guidance notes can be viewed on our website at www.inlandrevenue.gov.uk/so/sdlt_website.htm to enable you to view and become more familiar with the new returns.
(2)
The SDLT1 is the main Land Transaction Return which must be completed for all transactions. We expect this form to cover the vast majority of residential transactions.
(3)
In a minority of more complex cases the following supplementary returns may also need to be completed.
(4)
SDLT2 must be completed only where there are more than two vendors and/or purchasers.
(5)
SDLT3 must be completed only where additional information is required to identify the property or the transaction involves more than one property.
(6)
SDLT4 must be completed only where additional information is required about the transaction, for example when the purchaser is a company, where land is part of a business sale agreement, some leases.
(7)
SDLT6 is the guidance notes for the completion of the Land Transaction Return. We will be unable to accept photocopies of the SDLT 1 as each return has a unique reference number printed on the return. You should therefore ensure that you maintain a sufficient supply of the return since we will reject photocopied versions of SDLT1. [You may, however, use photocopies of SDLT 2, 3 and 4.]
(8)
It is our intention to open up an electronic channel to enable customers to submit returns via the Inland Revenue Web-site. This will not be available until the summer of 2004, but in the meantime interim arrangements are being set up to provide alternative channels of submission, both which enable on-screen completion of the forms.
9-
Substitute returns
(1)
We are looking at other ways to enable customers to complete approved forms on screen and on-line. Further information about filing options will be given in due course.
(2)
You will be able to order a bulk supply of payslips and each will have a unique identifier printed on them which will need to be entered onto the substitute form to make it a valid return and enable us to link payments with the completed return. "Crown Copyright Acknowledged"
