Stamp Duty Land Tax Manual

SDLTM15010 - Variation of leases: increasing rent in the first five years

Where a lease is varied to increase the rent in the first five years of the lease (but outside the terms of the lease, such that the variation does not fall to be included in any calculation of net present value (NPV) under FA03/SCH17A/PARA7: refer to SDLTM13075), the variation is treated as if it were the grant of a new lease in consideration of the additional rent payable, under FA03/SCH17A/PARA13. 

In this situation, the deemed grant of a new lease will often be linked to the grant of the actual lease (see SDLTM30100).

Effective date of transaction

The effective date of transaction for the deemed grant of a new lease is the date of the deed of variation.

Where the date of the deed of variation is within the first five years of the grant of the actual lease, but the rent increase does not take effect until after the end of the first five years of the lease, FA03/SCH17A/PARA13 does not apply.

Land Transaction Returns required

The land transaction returns that are required to be filed with HMRC in this situation depends on:

·       whether the deemed grant of the new lease is linked to the grant of the actual lease; and

·       whether the grant of the actual lease was a notifiable transaction under FA03/S77 (see SDLTM00310) or not.

1.    Grant of actual and deemed new lease are not linked transactions

The deemed grant of the new lease is notifiable to HMRC if:

·       it is the acquisition of a major interest that does not fall within one or more of the exceptions at FA03/S77A, or

·       where it is the acquisition of a chargeable interest that is not a major interest, but the chargeable consideration exceeds the relevant nil rate threshold (or would do so, if it were not for a relief).

If the transaction is notifiable, an SDLT1 should be filed within 14 days of the effective date of the deemed grant of the new lease. 

The SDLT1 should reflect the term remaining on the actual lease from the date of the increase in rent. 

The chargeable consideration will be the additional rent payable only. 

2.    Grant of actual and deemed new lease are linked transactions and grant of actual lease was notifiable

An SDLT1 should be filed within 14 days of the effective date of the deemed grant of the new lease. 

The SDLT1 should reflect the term remaining on the actual lease from the date of the increase in rent. 

The chargeable consideration will be the additional rent payable only. 

The tax chargeable on the NPV of the additional rent payable should be calculated in accordance with the rules for linked transactions at FA03/SCH5/PARA6. 

A further return may also be required within 30 days of the effective date of the deemed grant to account for additional tax chargeable on the grant of the actual lease in accordance with FA03/SCH17A/PARA8 (see SDLTM50320) or FA03/S81A (1) or (1A) (see SDLTM50350). 

3.    Grant of actual and deemed new lease are linked transactions and grant of actual lease was not notifiable

Where the grant of the actual lease was not a notifiable transaction and is linked to the deemed grant of the new lease, the increase in rent may result in the earlier transaction becoming notifiable.

If this applies, two separate SDLT1s will be required. 

The first will be for the newly notifiable grant of the actual lease and the second for the deemed grant of the new lease. 

Both SDLT1s must be filed within 14 days of the effective date of the deemed grant of the new lease.       

The SDLT1 for the deemed grant of the new lease should reflect the term remaining on the actual lease from the date of the increase in rent. 

The chargeable consideration will be the additional rent payable only. 

The tax chargeable on the NPV of the rent on the newly notifiable grant of the actual lease and the additional rent payable on the deemed grant of the new lease should be calculated in accordance with the rules for linked transactions at FA03/SCH5/PARA6. 

Situations where Paragraph 13 does not apply

1.    Where a variation takes place on or after 19 July 2006, paragraph 13 only applies if it takes place before the end of the fifth year of the lease. A lease which was subject to stamp duty rather than SDLT when granted will therefore never be subject to a SDLT charge if it is varied only to increase the rent after the end of the fifth year.

2.    An increase in rent as a result of a landlord’s election to waive exemption from VAT (merely adding the VAT to the existing rent) is not treated as a variation of a lease to increase the amount of rent.

Statutory rent reviews under the legislation governing agricultural tenancies are not variations of the lease. When calculating the NPV of rent under such tenancies, a reasonable estimate must be made initially of the rent for the first five years, to be revised after five years or once the rent becomes certain (refer to SDLTM13160).