STAMP DUTY LAND TAX Lee Nuttall, Wragge & Co LLP

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					                                   STAMP DUTY LAND TAX

                               Lee Nuttall, Wragge & Co LLP

Introduction

Stamp duty land tax (SDLT) is a new tax. From 1st December 2003, it is the principal tax on dealings in
UK land. Its introduction coincides with the abolition of stamp duty on UK real estate. SDLT adopts the
basic structure of stamp duty but “modernises” it by closing or severely restricting its reliefs and
loopholes, and by eliminating its idiosyncrasies.

Make no mistake “Modernisation” is about raising more revenue from UK real estate. With government
borrowing currently expected to exceed target by more than £10 billion and with the Treasury’s “golden
rule” (that government must only borrow to fund investment and not current spending) in danger of being
broken, Mr Gordon Brown needs all the additional tax revenue he can raise.

SDLT legislation has been hastily written and many of the detailed rules have yet to be published.
Primary legislation is in Finance Act 2003 but already amendments have been announced in principle
(though the actual wording is not yet available) to clarify ambiguities, to correct anomalies and to
introduce further anti-avoidance provisions. With barely a month to go before the SDLT goes live, many
aspects of primary legislation are unclear, secondary legislation is not available and the Inland Revenue’s
own internal manual is available only in draft form.

Whilst replacing stamp duty, SDLT is very different from it.

•    SDLT is a tax on transactions, not documents. The tax arises whether or not there is a document.
     Indeed, a liability to SDLT can arise even before a transaction is formally completed.
•    SDLT is not voluntary. It is a compulsory, self-assessed tax. The Inland Revenue is able to compel a
     purchaser to report a liability, self-assess and pay the tax.
•    SDLT requires neither the filing of original documents nor having them physically stamped. A new
     procedure for reporting transactions and paying the tax is introduced, the central feature of which is
     the land transaction return.

This paper provides a basic introduction to SDLT. It then focuses on the impact of SDLT on the grant of
new commercial leases.

When do the new rules come into effect?

Implementation day for SDLT is 1 December 2003. All transactions with an effective date (for the
meaning of which, see below) on or after 1 December 2003 will be subject to SDLT.

Where a contract to acquire an interest in land is completed before 1 December, SDLT will not be
applicable. Instead, the current stamp duty regime applies. In the majority of cases, the stamp duty
regime is more benign. A purchaser, with an anticipated completion date after 30 November, may find
it cheaper therefore to bring forward its completion date in order to fall within the stamp duty regime. In
some limited circumstances (for example, where part of the consideration consists of a capped overage
payment), a purchaser may find it cheaper to fall within SDLT regime and so defer completion until 1
December 2003.

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There are transitional provisions. Where a land contract was entered into on or before 10 July 2003,
then (provided it is not modified or varied after that date) the transaction will never be in the SDLT regime
- even if completed on or after 1 December 2003. Further information about transitional rules can be
found in Customer Newsletter - Issue 3 (found on the Inland Revenue website -
http://www.inlandrevenue.gov.uk/index.htm)

Simultaneously with the introduction of SDLT, stamp duty is abolished for all land transactions. There are
provisions the objective of which is to ensure that:-

•       transactions are not caught by both SDLT and stamp duty, in order to avoid any double charging,
        and
•       there is no gap through which to avoid both stamp duty and SDLT.

Basic mechanics

The basic mechanics of SDLT are set out in this section.

Land transaction return: SDLT imposes a statutory obligation on a purchaser1 to deliver a land
transaction return. This return is central to the administration of SDLT. It is the means by which the
Inland Revenue learns of the transaction. The return might be in several parts, depending on the
circumstances of the transaction in question. The main form (imaginatively titled SDLT1) is 7 pages long.
Except where the transaction is simple (basically, a standard residential purchase), other forms have to be
submitted giving further information. These forms are called SDLT2 (additional vendor/purchaser
details), SDLT3 (additional details about the land) and SDLT4 (additional transaction or lease details). A
guidance note (SDLT6) for completing the forms has also been published - it is 37 pages long.

Submitting the land transaction return replaces the need to send original documents and a “particulars
delivered” form to the Stamp Office.

You can view the forms by going to http://www.inlandrevenue.gov.uk/so/sdlt_website.htm on the
website.

Self-assessment: SDLT1 includes a self-assessment, whereby the purchaser calculates its own tax liability.
The Inland Revenue uses the information on the land transaction return to complete its own calculations
of SDLT due.

Obligation to pay: Liability to pay SDLT is imposed on a purchaser, and payment must be made
simultaneously with submitting the required forms. The liability is personal to the purchaser, and various
nasty things can happen to anyone who does not comply. As the Inland Revenue is able to open
enquires for up to six years (even in the absence of fraud), the purchaser is required to retain and
preserve all records relevant to the SDLT liability of the transaction.

SDLT certificate: Where the Inland Revenue’s calculation agrees with the purchaser’s self-assessment, a
certificate of compliance is issued to the purchaser. This certificate (SDLT5) only confirms that the
transaction has been notified to the Inland Revenue - it is not a guarantee that the proper amount of
SDLT has been paid in respect of the transaction. Where the calculations do not match, the Inland
Revenue will contact the purchaser and its advisers (via the local Stamp Office) to agree the amounts
due. HM Land Registry will not process applications for registration unless the certificate is produced
when the application is made.




1
    “Purchaser” also includes an assignee, a tenant and any other person acquiring any estate, interest, right or power in or over UK land.

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Self-certificates: Some land transactions do not oblige a purchaser to submit land transaction returns. In
these very limited circumstances, a purchaser can “self-certify” on a pre-printed form. This means that
the transaction documents (together with the self-certification) can be sent direct to HM Land Registry.
The self-certificates will be subject to audit and to the same enquiry process as land transaction returns.
Consequently, there is a duty to preserve records for at least 6 years.

“Process now - check later”: The issuing of a certificate (SDLT5) is not a guarantee that all SDLT due has
been paid. In the first place, the Inland Revenue has nine months from the filing date to corroborate the
details in the land transaction return. If not satisfied, it can open an enquiry into the return at any time
within that nine-month window. Secondly, where no land transaction return is filed, the Revenue has 6
years in which to make assessments of tax due. Finally, where information is “discovered” within a
period of 6 years of a land transaction suggesting that SDLT (or more SDLT) is due, then assessments can
still be made in certain circumstances. The time limit for discovery assessments increases to 21 years in
cases of fraud or negligence.

What triggers the obligation to make a return and pay SDLT?

As with any new area of tax, it is a familiarity with the terminology that is key to understanding how the
tax is imposed. This section explains some of the new jargon.

SDLT is a tax on land transactions. A land transaction is defined as the acquisition of a chargeable
interest. An acquisition is any acquisition. The way in which the acquisition is effected is unimportant - it
can be by agreement (whether written or not), or by act of the parties, or by operation of law, court order
or statutory provision. The creation, surrender, release or variation of a chargeable interest is specifically
identified as an acquisition.

A chargeable interest is very widely defined. It is an estate, interest, right or power in or over land in the
United Kingdom, or it is the benefit of an obligation, restriction or condition affecting the value of any
such estate, interest, right or power. This all-encompassing definition catches interests where SDLT is not
meant to apply - so exempt interests are excluded. Exempt interests include security interests (broadly,
mortgages), licences to use or occupy land and tenancies at will. Any acquisition of any exempt interest
is outside the scope of SDLT.

The acquisition of a chargeable interest must also be a chargeable transaction. A chargeable transaction
is a land transaction which is not exempt from charge. Those types of transaction which are exempt from
charge are listed in the legislation - and are very narrow in their application. They are broadly equivalent
to the current categories of exempt instruments, and cover items such as gifts and transfers in connection
with death or divorce.

A chargeable transaction which is also a notifiable transaction triggers a duty to notify the Inland Revenue
and a liability to pay the tax. A land transaction return must be submitted each time there is a notifiable
transaction. A notifiable transaction is any of the following:-

•    the purchase of a freehold or a leasehold interest (even where there is no SDLT to pay because of
     the use of the nil-rate band);
•    the grant of a lease for 7 years or more;
•    the acquisition of any other interest in land (including the grant of a lease for less than 7 years)
     where the rate of SDLT is at least 1%.

The return must be submitted (and SDLT paid) within 30 days of the effective date of a transaction.




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What is the effective date? In most cases, the effective date will be actual completion. The effective date
is however accelerated (and so SDLT becomes due sooner) where, before actual completion, a land
purchase contract is substantially performed. This rule is designed to counteract “resting on contract”
schemes. Substantial performance occurs where:-

•    the purchaser (or a person connected with the purchaser) takes possession of substantially the whole
     of the land. Possession is deemed to take place where the purchaser (or a connected person)
     receives or becomes entitled to receive rents or profits from the land. It is immaterial whether
     possession is taken under the terms of the agreement or under a separate (and temporary) licence,
     or
•    a substantial amount of the consideration is paid or performed. The Inland Revenue has confirmed
     that, in this context, it will generally interpret “substantial” to mean 90% or more. Where
     consideration is in the form of rent, it is specifically provided that the first payment of rent is sufficient
     to trigger substantial performance.

How is SDLT calculated?

The amount of chargeable consideration subject to SDLT is broadly any consideration in money or
money’s worth. This is far wider than stamp duty.

The SDLT charge can be based on consideration consisting of anything from VAT to jelly babies, or from
the provision of legal (and any other type of) services to the assumption of (or release of) existing debt.
Where consideration is not expressed in money, its value is its market value at the date of the transaction.

Consideration consisting of the provision of building services is subject to SDLT but there is an exemption
where specific conditions are met. In structuring transactions, care needs to be taken to ensure the
availability of this relief.

What rates of tax are applied?

The rates are those currently applicable to stamp duty. The thresholds are the same, except for
transactions in commercial property. So, the rate of tax to be applied depends on the amount and type
of the chargeable consideration, and the nature of property involved.

Non-rent consideration – Residential

Not more than £60,000 - 0%.
More than £60,000 but not more than £250,000 - 1%.
More than £250,000 but not more than £500,000 - 3%.
More than £500,000 - 4%.



Non-rent consideration – Commercial

Not more than £150,000 - 0%.
More than £150,000 but not more than £250,000 - 1%.
More than £250,000 but not more than £500,000 - 3%.
More than £500,000 - 4%.



Consideration in the form of rent – residential

Net present value of not more than £60,000 - 0%
Net present value of more than £60,000 - excess over £60,000 - 1%




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Consideration in the form of rent – commercial

Net present value of not more than £150,000 - 0%
Net present value of more than £150,000 - excess over £150,000 - 1%


More detail about the charge on rents under commercial leases is set out later in the paper.

Fixed duties (£5) on duplicates and counterparts of instruments that effect a land transaction are
abolished.

Is there any relief against the tax?

Some reliefs (for example, disadvantaged areas relief) have been imported from the stamp duty regime
without change. Disadvantaged areas relief is important. It remains possible under SDLT to acquire
substantial properties in the business districts of Birmingham or Leeds, or in London’s Midtown or
Docklands, without incurring any liability whatsoever to SDLT.

Other reliefs (for example, group relief, charities relief and relief for certain exchanges of land) have been
imported into SDLT but additional restrictions have been imposed.

There are some new, targeted reliefs. For example, transfers to local planning authorities pursuant to
CPOs or under s.106 Town & Country Planning Act 1990 agreements are exempt from SDLT. A new
relief is to be given for the leaseback element of a sale and leaseback transaction, provided certain
conditions are met (this relief was announced on 20 October but no wording is yet available).

Some reliefs have been severely restricted. The Inland Revenue, for example, wanted to abolish sub-sale
relief entirely. At the very last minute, Ministers conceded that some form of sub-sale relief was essential
- although the circumstances in which the new relief applies have been substantially curtailed.

Other reliefs have been discarded entirely. One example is the relief for an exchange (with equality
money) of commercial properties. Under stamp duty, it is possible to structure the transaction such that
the transfer of the lower value attracted only £5 duty. Under the SDLT regime, tax will be due on its full
value.

Why should I make a return and pay the tax?

SDLT is a compulsory tax. It should not be confused with the voluntary nature of stamp duty. There are
serious consequences where a purchaser fails to fulfil its statutory responsibilities. Some consequences
are simply financial; others limit a purchaser’s ability to deal with its land; ultimately, it can result in
imprisonment for the purchaser. Here are some random examples of the consequences of not complying
with the new rules.

•    A purchaser will be unable to register its purchase at HM Land Registry without an SDLT certificate of
     compliance.
•    There is a new statutory offence of fraudulent evasion of SDLT. Where found guilty, a purchaser is
     liable to imprisonment (for up to seven years) and/or a hefty fine. Falsification of documents is also
     an offence, which might result in imprisonment and/or a fine.
•    The Inland Revenue has been given new powers to inspect premises, and anyone delaying or
     obstructing the inspection commits an offence and is liable to a fine. There are also powers to call
     for documents from third parties (including the purchaser’s advisers – but subject to legal privilege).
•    There is a flat-rate penalty for failure to deliver land transaction returns - £100 if delivered up to
     three months late and £200 thereafter. Where the failure continues for more than 12 months, there
     is a tax-related penalty (in addition to the flat rate penalty). This could be as much as the SDLT itself
     and is of course payable in addition to the SDLT.

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•    There are daily penalties for failing to make returns having been notified of the need to do so. The
     maximum rate is £60 per day, and is payable in addition to flat rate or tax-related penalties.
•    A penalty (which again could be as much as the SDLT itself) is imposed where an incorrect return is
     made fraudulently or negligently. The same level of penalty may be imposed where a purchaser
     discovers an error in a return and then fails to correct it.
•    Penalties are imposed for failure to produce documents and information when required to do for the
     purposes of an enquiry.
•    A penalty of up to £3,000 is imposed for assisting in or inducing the preparation or delivery of a
     return or other information relevant to the SDLT charge which is known to be incorrect.
•    A penalty of up to £3,000 may be imposed where a purchaser fails to keep and preserve records
     relating to a land transaction.
•    Any late payment of a penalty carries an additional interest charge.
•    Civil proceedings can be taken to recover any unpaid SDLT.
•    Interest is also due where SDLT is paid late.
•    Where no return is filed, a “Revenue determination” of the SDLT liability can be made. This acts as
     a self-assessment and triggers the full might of the Revenue’s enforcement powers (particularly as to
     recovery). The determination can be made at any time within 6 years of the effective date of the
     transaction which gives rise to the liability.
•    The Inland Revenue has power to make a “discovery assessment” where they discover information
     creating (or increasing) an SDLT liability, or negating or clawing-back a relief. Where the reason for
     the loss of SDLT is fraud or negligence, an assessment to recover the SDLT can be made at any time
     up to 21 years from the effective date of the transaction; otherwise, the time limit is 6 years.

Purchasers should also bear in mind the novel prospect of “joined up thinking” from the Inland Revenue.
Cross-checking against corporation tax and/or personal tax returns will make it easier for the Inland
Revenue to discover that land transactions have taken place and the amount of consideration paid for
them.

SDLT and commercial leases

Having examined the basic structure of SDLT, the remainder of this paper takes a closer look at the
imposition of SDLT on the grant of new commercial leases.

Payment of SDLT is required for leases having an effective date falling on or after 1 December 2003
(except where the lease is granted pursuant to an agreement entered into before 11 July 2003 and is not
varied on or after that date).

In most cases, the change from stamp duty to SDLT will result in a substantial increase in tax for the
tenant on rents payable on the grant of a lease. For example,

•    a 5 year lease at £1,000,000 rent per year attracts stamp duty of £10,000 (1% of average annual
     rent). The same lease is subject to a £43,650 SDLT charge.
•    a 10-year lease at £100,000 rent per year attracts stamp duty of £2,000 (2% of average annual
     rent). The same lease is subject to a £6,816 SDLT charge.
•    A 35-year lease at £200,000 rent per year attracts stamp duty of £4,000 (2% annual average rent).
     The same lease is subject to a £38,501 SDLT charge.
•    A 50-year lease at £100,000 rent per year attracts stamp duty of £12,000 (12% of average annual
     rent). The same lease is subject to a £21,955 SDLT charge

The grant of a lease is a notifiable transaction where

•    it is for a term of 7 years or more; or
•    it is for less than 7 years and the premium or the rent would be (in the absence of any relief) subject
     to SDLT at 1% or higher.

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SDLT on premiums and other non-rent consideration

SDLT on lease premiums will be calculated in the same way as for stamp duty – that is, as a percentage
of the consideration, at rates up to 4%. But the nil-rate threshold for commercial leases is increased from
£60,000 to £150,000 with effect from 1 December 2003.

Where annual rent payable under the lease exceeds £600 per annum, the nil rate threshold is not
available. The rate of duty on the premium in these circumstances will be at least 1%, even if the
premium is nominal.

A different method of charging tax on rents

There is an entirely new method of calculating SDLT on rents. The new rule is that SDLT is charged at 1%
of the excess over £150,000 of the net present value (NPV) of all rent due for the term of the lease.
Where NPV does not exceed £150,000 on commercial leases, no SDLT will be payable at all on the rent
element.

NPV calculation in more detail

The calculation has 3 elements –

•    the temporal discount rate,
•    the length of the term of the lease and
•    the amount of rent payable.

Temporal discount rate: This is set by statute and is currently 3.5%. The Inland Revenue has the ability to
adjust the rate (up or down) by regulation when it chooses. The effect of applying the temporal discount
rate is to determine the value today of rents due in the future.

Term of lease: All rents due over the whole term must be aggregated. There are rules to determine what
is the length of the term for these purposes. The basic rule is that the term of a lease is:-

•    the contractual term specified in the lease, or
•    the period from the date of actual grant until expiry of the contractual term (if shorter).

There are then a number of special rules providing guidance for ascertaining the term for the purposes of
the calculation.

Where an agreement for lease is substantially performed before grant, the term begins on the date of
substantial performance.

Where a new lease is granted by way of renewal of an old lease (for example, under the Landlord and
Tenant Act 1954) the term of the new lease begins on expiry of the old lease.

Where a lease is granted for a fixed term and thereafter until determined, it is treated as a lease for a
definite term equal to the fixed term together with such further period as must elapse before the earliest
date on which the lease can be determined.

Where a lease is extended during the currency of its term, this extension is treated as the grant of a new
lease for the period by which the term of the lease is extended.




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Where a lease comes to an end but the landlord does not require possession, a periodic tenancy is
created which extends the term of the lease. This extension will be treated as the grant of a new lease for
a period of 12 months. Should the new lease continue past this period, there will be deemed to be
another lease of similar length and so on.

Any right to determine or to renew the lease (whether by the landlord or the tenant) is ignored. This
means that:-

•    the term of the old lease is deemed to expire on the renewal date. If the lease is renewed, then this
     is a new lease separate to and independent of the old lease.            SDLT is charged (and a land
     transaction return must be filed) at the time of renewal.
•    the term will not expire when a right to determine arises. The term is deemed to continue until expiry
     of the contractual term. As this will extend the term (and so increase the SDLT liability), this rule may
     force tenants to demand that landlords grant shorter leases but with options to renew.

Rent payable: In determining rent payable, the following matters are ignored (and so do not form part of
the calculation):-

•    any adjustment to rents in line with the retail prices index
•    any tenant’s undertaking to pay for services, repairs, maintenance or insurance, or to pay for the
     landlord’s management costs
•    any guarantee by a third party of the tenant’s obligations
•    any penal rent payable following a tenant’s breach
•    any other obligation undertaken by the tenant that is not such as to affect the rent that a tenant
     would be prepared to pay in the open market
•    any rent review to market value provided that the review does not occur on or before the end of the
     second year of the lease. Where the review occurs within this period, then the new rent is caught
     and is chargeable.
•    any VAT where, on the effective date, the landlord has not elected to waive the exemption from VAT.

All other consideration must be included in the calculation.

Once the rent and the term have been determined, a statutory formula must be used to calculate NPV.
This is expressed as follows:-



                                             n
                            v =                            ri

                                          i=1          (1 + T) i

                 where:

                 v is the net present value of rent payable over the term of the lease

                 ri is the rent payable in year i

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

                 n is the term of the lease and

                 T is the temporal discount rate




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The Inland Revenue has promised to provide a calculation tool on its website. There is still no indication
when this will be available. Many firms - mine included - have their own NPV calculator to assist clients
with their calculations.

Particular issues with leases

Surrender and regrant: A new lease may be granted in consideration (amongst other things) of the
surrender of an existing lease. Where the old lease is of substantially the same premises and the
unexpired term is substantially the same as the term of the new and the new lease is on substantially the
same terms, then

•    the surrender is ignored and does not form part of the chargeable consideration for the new grant,
     and
•    the new grant is not consideration for the surrender of the old lease.

This is a more benign regime than stamp duty.

Additionally, the Inland Revenue has confirmed its intention, when calculating SDLT on the new lease, to
give credit for the amount of rent that was due for the surrendered years under the old lease. Wording is
not yet available to give effect to this concession.

Surrenders: Where a landlord pays a tenant to surrender its lease, that surrender is a transaction subject
to SDLT and the landlord is obliged both to file a land transaction return and to pay the SDLT in the
normal way. It is immaterial that the surrender is by way of deed, uncompleted agreement or by
operation of law.

Where, however, a tenant pays a landlord to induce the landlord to accept a surrender of its lease, the
payment is not chargeable consideration for the surrender and can be ignored.

“Reverse” payments on grant: Where a landlord pays a tenant to induce the tenant to take a lease, the
payment can be ignored in calculating SDLT on grant of the lease.

Carrying out works: Where, as part of the consideration for the grant of a lease, a tenant carries out
works of construction, improvement or repair, the value (not the cost) of those works must be brought
into account as chargeable consideration. Subject to fulfilling certain conditions, it is possible to avoid
the SDLT charge on the works element of the consideration.

Connected companies: Where the landlord and the tenant are connected companies, the Inland Revenue
is able to ignore actual amounts paid and to substitute a market value. SDLT is then chargeable on that
substituted value. This general rule is subject to certain limited exemptions (for example, where one
company is acting in a nominee capacity).

Post-5 year rent changes: It was announced on 20 October 2003 that all rent changes after 5 years are
to be ignored for the purposes of calculating NPV. This works by deeming the highest rent paid in the
first 5 years to be the rent for the remainder of the term. This gives rise to avoidance opportunities. So,
anti-avoidance measures have also been announced (though the wording is not yet available). The
effect of these measures is that, where after the first 5 years of a lease rent actually increases by more
than RPI plus 5%, a new lease is deemed to be granted for a rent equal to the increase.




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Contingent rent: This has proved to be a particularly difficult area.

•    Where rent is due but only contingently, the contingency is to be ignored in calculating the initial
     SDLT liability. As a result, SDLT is paid up-front on rents which may never be payable. There is no
     right to defer payment of SDLT to the date on which the contingency occurs.
•    When the contingency occurs, the rent becomes ascertained. A further land transaction return must
     be made at that time. Where less SDLT is due than was originally paid, the tenant can claim
     repayment of the excess (plus interest on that excess from the date of the original payment).

Unascertainable rent: Again, this is a difficult area.

•    The principle is that where rent (or part of the rent) is not ascertainable on the due date, the amount
     of the rent must be estimated (on a reasonable basis) and SDLT paid accordingly. There is no right
     to apply to defer payment of SDLT. When the rent becomes ascertainable a further land transaction
     return must be filed. If SDLT has been overpaid, then the tenant can apply for a repayment (with
     interest) of the excess. If SDLT has been underpaid, then the tenant is liable to make up the deficit.
     Interest is due on that deficit where it is not paid within 30 days of the rent having been ascertained.
•    Where a tenant pays a “turnover” rent, there is the alarming prospect of its having to make a land
     transaction return (say) quarterly, together with adjusting payments or repayments. This constitutes a
     severe compliance burden. Recognising this, the Inland Revenue is now to amend Finance Act
     2003. Where all uncertainty is determined before 5 years, then only one additional land transaction
     return is required and must be filed at the point when the uncertainty is removed. Where a lease has
     a rent which is still uncertain after 5 years, one (and only one) additional SDLT return is required at
     the 5 year point. This will base the NPV on the rent actually paid in the first 5 years and (for the
     remainder of the term) will use the highest rent paid in the first 5 year period. This is the principle of
     the change - the actual words have not yet been published.
•    This new treatment itself results in disparity between turnover rents and rents whose increase is fixed
     (for example, stepped annual 5% increases). In order to address this disparity, it seems that rents
     that are known after 5 years are to be ignored. Instead, the highest rent payable in the first 5 year
     period is deemed to be the rent for the remainder of the term. If this finds its way into legislation,
     then it is a substantial new concession.

Licences: SDLT does not apply at all to a licence to use or occupy land. This is because a licence is
neither an interest in nor right over land but merely a right personal to the licensee. Where a licence is
all that is required, SDLT can therefore be avoided. Care must be taken - merely labelling a transaction
as a licence will not be sufficient where, in substance, a lease is granted at law.

Agreements for lease: Entering into an agreement for lease does not, by itself, trigger an SDLT charge.
Where an agreement is substantially performed without its being completed by a grant, an SDLT liability
will arise – SDLT must be paid and a land transaction return filed. An agreement for lease is substantially
performed when:-

•    the tenant takes possession of substantially the whole of the demised premises or
•    the tenant pays or performs a substantial amount of the consideration. This is triggered either by the
     first payment of rent or by payment of substantially the whole of any other consideration – for
     example, of a premium.

When analysing whether or not possession has taken place, it is immaterial whether possession is taken
under the terms of the agreement for lease or under a separate temporary lease or licence. Particular
care needs to be taken, therefore, when a tenant enters the demised premises prior to the grant of the
lease - for example, to perform fitting out works. Arrangement such as these might trigger substantial
performance of the agreement for lease and so accelerate the due date for payment and filing.




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Summary

The impact of SDLT will be felt on all land transactions - even where, ultimately, no SDLT is due or no
land transaction return has to be submitted. Professionals need to be fully aware of its implications, to
avoid clients being subjected to the full might of the Inland Revenue’s enforcement and compliance
powers.

It appears complex now because it is a new tax and is full of new jargon - but we can all get used to that
over time. It is properly complex in its anti-avoidance objectives. Giving definitive advice is difficult
because of imprecise language of the charging provisions.

Ambiguities will continue to emerge as the tax is put into practice. The administration will no doubt
improve as teething troubles are dealt with and procedural efficiencies are introduced. It is hoped that
the Inland Revenue will use a sensible approach to fines, penalties etc. particularly in the early months.
Ultimately, we must have a system of SDLT administration to dovetail seamlessly with paperless
conveyancing by 2007, and so further changes are inevitable.

In many circumstances, the cost of SDLT will be greater than under stamp duty.

It used to be true that the imposition of tax had to be clear. The taxpayer has to be clear what is taxed
and what is the liability. Because of the haste with which this new legislation was introduced, many of its
provisions are unclear. The Inland Revenue’s own SDLT Manual has yet to be formally published and, in
its draft form, contains assertions which are not supported by the legislation. Already, a series of
“clarifications” and amendments has begun. There is still no guidance at all on how SDLT applies to
securitisations or to private finance initiative deals.

There is still a long way to go before 1st December 2003.


Lee Nuttall LL.M
27 October 2003

This paper is for guidance only and does not offer legal advice.

The author is a solicitor and partner in the Real Estate Group at Wragge & Co LLP, and heads its Real
Estate Tax Team. He can be contacted on +44(0)121 233 1000 (or direct on +44 (0)121 685 2734) or
by e-mail at lee_nuttall@wragge.com




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