The Stamp Duty Land Tax (“SDLT”) risks of holding over to manufacturing tenants.
Manufacturers often occupy premises under a commercial lease. It often suits the business to continue in occupation following the end of the term of the lease as the management may wish to keep their property options open or are negotiating a renewal. This situation will often also suit the landlord. The process of negotiating a new term and the details of the renewal can take some considerable time.
One detail often overlooked by manufacturers during the renewal process is the potential SDLT implications. SDLT may be payable on the renewal but may also be payable in respect of the period following the end of the lease term and settling the renewal. This period is usually referred to as ‘holding over’. The application of SDLT rules to this period can be quite difficult to interpret.
In certain circumstances a business tenant may have a right to remain in occupation of a property or has a statutory right to renew its tenancy at the end of the original term of its lease.
Where the tenant occupies the property for its business, they may be permitted to renew their lease at the end of the contractual term under sections 24 to 28 of the Landlord and Tenant Act 1954 (LTA 1954). The term of the lease will continue by operation of law until a new lease is granted.
In certain circumstances, the parties may contract out of the provisions of the LTA 1954 and where the lease is contracted out, the tenant will not benefit from a statutory right to occupy the property at the end of the term, but may still be remaining in occupation.
If the tenant does remain in occupation after the end of the term, when the lease is so contracted out then it is likely that its occupation will be either as:
- a tenant on sufferance
- a trespasser
- a tenant at will or
- a tenant under an implied periodic tenancy.
Aside from the many, often complex negotiations, around the commercial terms of a lease renewal, the question of SDLT should also be addressed. If SDLT is considered early in the renewal process, some common pitfalls (and penalties) can be avoided.
Where the original lease was subject to SDLT, then the period of holding over may be also. This will depend on a number of points, including:
- whether the tenant has a statutory right to a renewal under the LTA 1954 or not;
- whether the new lease is backdated to the end of the term of the original lease or starts at the date of completion; and
- how soon after the end of the original term the lease is settled.
The rules around SDLT can appear quite complex and there are a number of nuances, which can make their application quite tricky.
Generally, where a renewal lease is granted which is not backdated to the end of the original term, SDLT due on the original lease will be calculated by, in effect, tagging the period of holding over onto the original term.
Where the rents (and any premium) are relatively low, this may result in no additional SDLT being payable. However, it may result in an SDLT return being required even where no SDLT was payable under the original lease.
Thankfully, in recent years, the requirement to file a nil return, where no SDLT (or additional SDLT) is payable , has been done away with in many circumstances, but care should be taken as in some situations (such as where the original lease term plus the period of holding is 7 years or more) an SDLT return may still be required.
A further complication arises where the period of holding over exceeds 12 months. In this situation, the SDLT position will need to be considered and a return potentially filed, even though a renewal has not yet been settled. This is the case for each full 12 month period following the end of the original term.
Where an SDLT return is not filed when due, then an immediate £100 penalty may be payable and interest may also be levied on any SDLT due.
SDLT replaced Stamp Duty in December 2003 as a result of the Finance Act 2003 and since that date the VAT rate in the UK has also changed from 17.5% (applicable between 1 January 2010 and 3 January 2011) to its current level of 20% (from 4 January 2011).
Given that SDLT is calculated by reference to rent (and any premium payable) inclusive of VAT, this can make calculations even more complex and presents a further potential trap into which unsuspecting tenants may fall.
Knowing your tax liability and how this impacts on cash flow in always a crucial consideration for any manufacturing business.