Leases

A raft of detailed provisions apply to charge SDLT on the rental element of a lease; any premium paid is calculated separately, but broadly in the same manner as freehold transactions.  Consequently a straightforward transaction involving leasehold property can give rise to a complicated analysis and SDLT calculation.SDLT is charged on the net present value of a lease using the statutory formula:

ri is the rent in respect of the year

i is the first, second, third etc. year of the term

n is the term of lease; and

T is the temporal discount rate (currently 3.5%)

The effect of the formula is broadly to charge SDLT (at the rate of 1%) on the discounted value of rents over the entire term of the lease.

Difficulties arise where rent is variable, uncertain or contingent (e.g. a rent review in the first five years of the term); where the term of a lease is indefinite; or where the tenant provides consideration other than rent or a premium (e.g. an agreement to do works).  The subsequent adjustment of rent after the first five years of the term can give rise to a further charge to SDLT if an abnormal increase in rent.

Specific charging provisions apply to tax the variation of a lease in defined circumstances.  There are also charges imposed on the surrender of a lease in certain circumstances.  The connected company rule applies to leasehold transactions so that the chargeable consideration for SDLT purposes is taken to be not less than the market value of the subject matter of the transaction.  The linked transactions rule applies in respect of leases, the effect of which is to treat all linked transactions on a single transaction in calculating the relevant net present value and applying the appropriate rate table.  SDLT reliefs generally apply to leasehold transactions in the same way as freehold transactions.

The imposition of SDLT on a leasehold transaction is never straightforward.  An understanding of the relevant SDLT rules coupled with a detailed review of the provisions of a lease and an related transactions is necessary to correctly calculate the SDLT chargeable.

For more information please email jfeaster@edftax.co.uk or call 07526 003021 to speak to John.