What is a growing lease?
A growing lease is, quite simply, a lease which is deemed to grow beyond its initial term. This may apply to leases with an unknown or an indefinite term or where a tenant remains in occupation (or “holds over”) under (1) a lease granted for a fixed term and thereafter until determined; or (2) a lease granted for a fixed term that continues beyond its term by operation of law, for example, where a tenant has security of tenure.
So, a periodic tenancy will be deemed to have a term of twelve months and when the tenant remains in occupation beyond this period, the term will be deemed to have grown by a further twelve months for the purposes of reassessing the SDLT liability. This will continue until the tenant vacates.
On the expiry of a lease with a fixed term, where the tenant has security of tenure and remains in occupation, the lease will be deemed to grow by a further year from the day after expiry of the fixed term. If the tenant holds over for more than a year, the term will grow by a further year and so on until either the tenant vacates or a renewal is granted.
When is a growing lease return required?
We will consider two scenarios:
(1) a tenant holds over but vacates within a year of expiry of the fixed term of the lease; and
(2) a tenant holds over for more than a year following expiry of the fixed term and remains in occupation.
In the first scenario, the growing lease term runs from the commencement of the fixed term until the date the tenant vacates. Where a return was previously notifiable, a new return must be filed by way of a letter to the Stamp Office within 30 days of the date the tenant vacates. Where a return was not previously notifiable however, and the tenant vacates on or after 1 March 2019, a new return must be filed (using the usual form SDLT1) within 14 days.
In the second scenario, once the tenant has held over for a year, a further return may be required. As above, depending on whether the original return was notifiable this may need to be filed within 14 or 30 days.
In both scenarios, a calculation will need to be made of the SDLT on the extended term with the SDLT paid on the original return then deducted. In the case of the second scenario, the growing lease term will be one year more than the fixed term of the lease.
The rates of SDLT/VAT that applied at the effective date of the grant of the lease will apply to the growing lease. It is also worth noting that a lease with a term of seven years or less does not become notifiable purely because it has grown to be for a term of seven years or more.
Where no SDLT was payable on the grant of the lease and the Net Present Value (“NPV”) of the growing lease still falls within the nil-rate band, no return is required.
Example 1
A Ltd is granted a new non-residential lease, with security of tenure, on 1 January 2013 for a five year term commencing on 1 January 2013 and expiring on 31 December 2017. Rent is reserved of £28k per annum and the Landlord has not opted to tax. A Ltd holds over until 31 March 2019 before vacating. The lease would not have been notifiable as (1) the lease was for a term of less than seven years; and (2) the NPV fell below £150k. The deadline to notify HMRC of the growing lease fell 30 days from the anniversary of the expiry of the fixed term, being 29 January 2019. A new NPV calculation would have been undertaken on the basis of a six year term. As the NPV still fell below £150k, no return was required. On vacating the premises, A Ltd must make one final calculation, on the basis of a term of six years and three months. This time the NPV just falls above £150k and therefore a return will be required using form SDLT1 within 14 days of 31 March 2019 with SDLT payable of £46.
Example 2
B Ltd is granted a new non-residential lease, with security of tenure, on 1 January 2013 for a five year term commencing on 1 January 2013 and expiring on 31 December 2017. Rent is reserved of £40k per annum and the Landlord has not opted to tax. B Ltd holds over until 31 March 2019 before vacating. A return would have been submitted within 30 days of the grant of the lease as the NPV fell above £150k with SDLT being payable of £306. The deadline to notify HMRC of the growing lease fell 30 days from the anniversary of the expiry of the fixed term, being 29 January 2019. A new NPV calculation would have been undertaken on the basis of a six year term. SDLT would have been calculated at £631 but £306 deducted (the amount paid on the initial return). A further return, in the form of a letter to the Stamp Office, would have been made for £325. On vacating the premises, B Ltd must make one final calculation, on the basis of a growing lease term of six years and three months. The SDLT is calculated at £708 but £631 can be deducted from this (the amount of SDLT paid to date). A final return, again by way of letter to the Stamp Office, will need to be filed within 14 days of 31 March 2019 with £77 payable.
It is important that returns are filed in a timely manner and for the correct sums otherwise a penalty and interest may be levied.
POROS’ Growing Lease calculator is the first of its kind on the market and enables users to assess the SDLT due for both partial and full years of holding over.