Section 197 and Schedule 41: Stamp Duty Land Tax: Leases
Summary
1.Section 197 introduces Schedule 41 which amends Schedule 17A of the Finance Act 2003 (FA 2003). Schedule 17A makes special provision for Stamp Duty Land Tax (SDLT) on certain types of lease transactions. The amendments will abolish the rules on abnormal rent increases. They will also simplify the reporting requirements where a lease continues after the expiry of its fixed term and where an agreement for a lease is substantially performed before the actual lease itself is granted.
Details of the Schedule
2.Paragraph 1 provides for amendments to be made to Part 4 of FA 2003 (in which Schedule 17A is contained).
Leases that continue after a fixed term
3.Paragraphs 2 and 3 amend paragraph 3 of Schedule 17A.
4.Paragraph 3 of Schedule 17A applies where a lease continues after the expiry of its fixed term. Currently, it provides that, where a lease continues after the end of its fixed term, it is treated as extended (in yearly increments). If any additional tax is due in respect of the extended lease, a return, together with the tax due, must be submitted to HMRC within 30 days after the expiry of the original (or previously extended) fixed term.
5.Paragraph 2 amends paragraph 3(3) of Schedule 17A to provide that, where a lease is treated as extended under that paragraph, notification of any additional tax due need not be given until 30 days after the end of the period of extension. It also provides that, where the lease is terminated before the end of the one-year period of extension, notification is required within 30 days of the date of termination. It also provides that no additional tax is due payable, and therefore no return is required under paragraph 3 where, during a period (or further period) of continuation, a new lease is granted in circumstances where paragraph 9A applies.
6.Paragraph 3 inserts a new paragraph 3A into Schedule 17A. Paragraph 3A provides, in essence, that paragraph 3 does not apply in cases where a new lease is granted within one year of the date of expiry of the original fixed term (or of any one-year extension). Instead, the new lease is treated as beginning immediately after that date. Any rent payable in relation to the extended lease is treated as payable under the new lease. It also provides that the paragraph (that is, paragraph 3A) does not apply where paragraph 9A applies. Paragraph 9A applies where a backdated lease is granted to a tenant holding over.
7.Paragraph 4 amends section 87 of FA 2003, by specifying “the relevant date” for the purpose of any interest payable on unpaid tax when paragraph 3(3) applies.
8.Paragraph 5 amends section 119(2) of FA 2003, by adding paragraph 3(4) of Schedule 17A to the list of provisions that provide for a different “effective date” from that set out in section 119(1).
Agreement for lease
9.Paragraph 6 changes the rules that apply when an agreement for lease is substantially performed before the lease itself (“the actual lease”) is granted. The current rules are contained in paragraph 12A and 19 of Schedule 17A. Paragraph 19 makes provision for leases (or, where appropriate, missives of let) in Scotland.
10.Paragraph 12A applies where, before a lease is granted, an agreement for lease is entered into and the agreement is substantially performed. The agreement is treated as the grant of a lease beginning on the date of substantial performance. If the transaction is notifiable, a return has to be submitted, and any tax chargeable paid, within 30 of the date of substantial performance. When the actual lease is granted, the notional lease is treated as surrendered and the actual lease is treated as if it were granted in consideration of the surrender of the notional lease. A second return is required for the actual lease. Relief is available for any period of overlap between the notional and actual leases.
11.Paragraph 6(2) replaces paragraph 12A(3) with a new paragraph 12A(3) and inserts new paragraphs 12A(3A) and 12A(3B).
12.The new paragraph 12A(3) provides that, where an agreement for lease has been substantially performed and a lease is subsequently granted, the notional lease is treated as a lease granted on the day of substantial performance, for a term beginning on that day and ending at the end of term of the actual lease. The consideration for the lease is the total rent (and any other consideration) payable over its term.
13.The new paragraph 12A(3A) provides that, where paragraph 12A(3) applies, the actual lease is disregarded except for the purposes of section 81A of FA 2003. Section 81A requires a return, or further return, to be submitted when a transaction is linked with an earlier transaction and the effect of the later transaction is that the earlier transaction becomes notifiable or there is any additional tax to pay.
14.The new paragraph 12A(3B) provides that the notional and actual leases are linked for purposes of section 81A and that, if there is any additional tax to pay, it is lessee under the actual lease who must submit a further return and pay the tax.
15.Paragraph 6(3) replaces paragraphs 19(2) and (4) of Schedule 17A with new paragraphs 19(2), 19(2A), 19(2B), 19(4), 19(4A) and 19(4B). These make similar provisions for Scotland.
Abnormal rent increases
16.Paragraph 7 repeals paragraphs 14 and 15 of Schedule 17A and makes consequential amendments to FA 2006 and the Scotland Act 2012. Paragraphs 14 and 15 impose an additional SDLT charge where there is a rent increase after the first five years of the term of a lease and this increase is 'abnormal'. Broadly speaking, an increase is abnormal if the rent doubles, or more than doubles, after the fifth year. HMRC must be notified each time there is an abnormal increase.
Commencement
17.Paragraph 8 provides that the amendments made by paragraphs 1 to 7 will have effect from the date on which Finance Bill 2013 receives the Royal Assent:
The abolition of the rules on abnormal rent increases will apply to any increases on or after that date.
The changes to the rules on fixed term leases will apply where the period of continuation begins on or after that date.
The amendments concerning substantial performance will apply where the effective date of the actual lease is on or after that date.
Background
18.Following representations from stakeholders, it was announced at Budget 2012 that the Government would explore ways of simplifying the complex rules that apply to certain lease arrangements. Informal consultation took place over the summer with industry representatives and other interested stakeholders.
19.Taking account of these discussions, the Government has decided to abolish the abnormal rent increases provisions and streamline the reporting requirements where a lease continues after the expiry of its fixed term and where an agreement for lease is substantially performed before the actual lease is granted.
