THE BASIC POSITION
When calculating the SDLT due on a new lease the key points to identify are the effective date (the date of completion or substantial performance if earlier), the start and end date of the term and the values of the premium and the annual rent for the first five years of the term. The latter will then enable a calculation of the Net Present Value of the rents paid over the term (calculated by multiplying each year’s rent by a temporal discount rate to take account of inflation at 3.5% every year). The resulting figure will then be taxed using a slice system at the following rates:
| Rent Bands | Percentage Rate |
|---|---|
| £0-£150,000 | 0% |
| £150,001-£5,000,000 | 1% |
| £5,000,001+ | 2% |
Example
An NPV of £6,000,000 will be taxed as follows:
£150,000 @ 0% = £0
£4,850,000 @ 1% = £48,500
£1,000,000 @ 2% = £20,000
Total SDLT due on rents: £68,500
The premium will also be taxed on a sliced system using the following rates:
| Premium Bands | Percentage Rate |
|---|---|
| £0-£150,000 | 0% |
| £150,001-£250,000 | 2% |
| £250,001+ | 5% |
There are however a number of traps which solicitors often fall foul of when making the calculation:
THE COMPLEXITIES THAT POROS DEALS WITH
VAT
If the Landlord has opted to tax then the premium and rent will be subject to VAT. For example, an annual rent of £100,000 will then become £120,000 which will have an impact on the NPV and the amount of SDLT payable. The SDLT calculation is often somewhat of an afterthought and can be delegated to a junior member of the team who is not familiar with the tax position taken by the Landlord. POROS prompts this consideration to avoid the risk of underestimating the SDLT liability.
Term Commencement Date pre-dates the Date of Lease
Calculating the term of a lease when the term commences on the date of the lease or where the lease commences at a future date is fairly straightforward. The rule in Bradshaw v Pawley [1980] 1 WLR 10 makes matters more complex where the term commencement date precedes the date of the lease. The term will commence on the latter of the date of the lease or the term commencement date and any rents payable prior to the date of lease are to be treated as premium. Following the changes in SDLT legislation in 2016, this becomes crucial as it allows rents to be considered as premium and therefore entitled to their own tax-free band. A failure to consider this could result in your client paying more SDLT than required.
Example
Term Commencement Date: 1 January 2017
Date of Lease: 1 January 2018
Term End Date: 31 December 2026
Annual Rent: £100k plus VAT
Premium specified in lease: None
On the basis of the above, and assuming rent is payable from the Term Commencement Date, the first year’s rent would in fact be treated as premium. The term for the purposes of the NPV calculation would then be reduced to 1 January 2018 to 31 December 2026. As the £120,000 premium falls within the £150,000 0% band no SDLT would be payable. The SDLT on the NPV would be £7,629 (rather than £8,479 where the lease term is calculated as commencing on 1 January 2017). In this example, that is a £850 saving for your client.
This also becomes key when dealing with leases with stepped rents. Whilst the heads of terms might clearly specify that year 1 has rent of £100k and year 2 has rent of £120k, this will not necessarily accord with years 1 and 2 for the purposes of the SDLT calculation.
Example
Term Commencement Date 1 January 2017
Date of Lease 1 April 2017
Term End Date 31 December 2026
Year 1 Rent £100k
Year 2 Rent £120k
For the purposes of the SDLT calculation, to determine the year 1 rent it is necessary to identify the first year of the term (1 April 2017-31 March 2018). During this period, rent of £100k is payable from 1 April 2017 until 31 December 2017 (275 days) and £120k is payable from 1 January 2018 until 31 March 2018 (90 days). Therefore an apportionment is required:
£100k/365 x 275 = £75,342
£120k/365 x 90 = £29,589
Total Year 1 Rent: £104,931
Failure to take account of the Bradshaw v Pawley rule and identify the correct term start date for the purposes of the SDLT calculation could therefore result in a significant underestimate of your client’s SDLT liability which could expose them to a penalty and interest.
Rent Free Periods
Rent free periods are often miscalculated. The tendency with a three month rent free period, for example, is to divide the rent by four. This does not, however, take account of the fact that the number of days differs between quarters.
A rent free period running from 1 January 2017 to 31 March 2017 covers 90 days in a 365 day year. This equates to 24.7% of the year. For the purposes of an SDLT calculation, whilst this may not have a huge impact on the SDLT liability assessed, it will impact upon the NPV.
Example
Annual Rent: £100k plus VAT with a rent free period from 1 January 2017 to 31 March 2017
Term: 1 January 2017 to 31 December 2026
NPV: £969,404 (as opposed to an NPV of £969,007 on an estimate of a year 1 rent of £100k plus VAT x ¾)
The example above, if calculated on a rough three-quarters determination of first year rent, would result in an underpayment of SDLT of £4. This would seem a small shortfall but HMRC could nevertheless levy a penalty payment and interest which could see this result in your client owing in excess of £204.
Leap Years
As the above example indicates, small numbers can make a difference and this also extends to leap years. The fact that one in four years has an extra day is often forgotten when calculating a daily rate.
POROS will require you to input five things:
- Whether VAT is payable
- The date of the lease
- Its Term Commencement Date
- Its Term Expiry Date
- The amount of any premium payable
Where the term commencement date pre-dates the date of the lease, the calculator invites you to complete a figure (or figures) for ‘Rent Calculated as Premium’ (RCaP). Note, the figure may be a zero figure, if no rent is payable until the date of the lease or may be a zero figure where no rent becomes payable until a rent commencement date that is after the date of the lease, or may actually be more than one figure, where rent at varying levels is payable in the period before the date of the lease.