Changing duty on commercial leases

Royal Assent to the Finance Bill is anticipated some time in July, at which point, detailed guidance will be published.

At the moment there are few statistics available to help assess the impact of the proposed changes.  It is anticipated that stamp duty will increase, but how will the new rates compare?  Who will be the winners and the losers under the new regime? What opportunities might exist for tax planning over the next few months?

The Proposed New Regime

The proposed new regime will replace the existing stamp duty on leases with a one percent charge on the Net Present Value (NPV) of the lease. The NPV equates to the total rent payable over the term, discounted at a rate of 3.5% per annum to reflect the fact that payments due in the future are worth less than if they were payable instantly. A new exemption for commercial leases whose NPV is £150,000 or less has been introduced. The Inland Revenue estimate that this will take around 60% of all new commercial leases out of charge altogether. There is also (presently) relief for commercial properties in disadvantaged areas.

VAT

VAT will not be included in the charge to tax unless the landlord has opted to charge VAT when the lease is granted. It is likely that of the estimated 40% of leases which will be stampable, most landlords will be charging VAT on the rent. In some cases, the addition of VAT may bring a lease over the stamp duty threshold. For example, the Inland Revenue Press Notice indicates that a ten year lease will be exempt if the rent is less than £18,000 each year. That is correct if no VAT is payable, but otherwise the true threshold will be closer to £15,000 plus VAT ( £17,625 p.a.).

How will it work?

The key to gauging the impact of the intended changes lies in understanding how the Net Present Value of each lease will be calculated. Only then can appropriate comparisons be made. Set out on the next page, in table form, is one interpretation of the possible position, compiled using the Treasury Green Book rates. It gives an indication of what the possible new rates might be (assuming VAT is chargeable), and how they compare to existing rates. The table is not definitive and since the legislation is still under consultation, it may not reflect the final position. (If accurate figures are required for tax planning or other purposes, they should be sought directly from the Inland Revenue.)

Scope for Tax Planning

The changes will apply to leases completed on or after 1 December where they relate to contracts entered into after Royal Assent is granted.  Contracts entered into before Royal Assent is granted will usually be chargeable with stamp duty at the existing rate, even if completed after 1 December. Contracts completed before 1 December should also attract duty at the existing rate, even if entered into after Royal Assent is given.

Tenants presently negotiating a contract for a lease due to be completed after 1 December, which would be stampable under the current rules, but will qualify for exemption, post 1 December, might consider delaying conclusion of missives until after Royal Assent has been granted.

Tenants who are likely to face a larger stamp duty bill after 1 December might consider the possibility of concluding a contract within the next few weeks (before Royal Assent is given) even if the intended completion date is a number of months away. If that is not possible, could the date of entry be brought forward to, say, 30 November?

A word or two of caution. Any contract entered into before Royal Assent is granted, runs the risk that the legislation may not be enacted at all, or that it may be enacted in a different form to that originally anticipated. Also, the date of entry might not be the most appropriate date to use when calculating the duty payable. At present the Stamp Office tend to use the later of the date of delivery of the deed or the last date of execution of the lease as the guiding factor in assessing duty, penalties etc. Pending formal clarification of this point, it might be sensible to specify in the contract that the lease is to be executed in advance of the date of entry, so that the fully executed deed is available for delivery on the date of entry.

It remains to be seen what tools will be made available to solicitors and tax advisers to assist in ascertaining Net Present Values (and therefore the amount of stamp duty payable). At the moment it is not an easy calculation, given the number of variables to be taken into account. Guidance will be needed before solicitors can confidently certify (for example) that a Stamp Duty threshold has not been exceeded.

Caroline James, Tods Murray

Caroline.James@todsmurray.com