Inland Revenue second-guesses stamp duty schemes
by Keith Miller of thePublican.com's legal team of experts from London solicitors Joelson Wilson.
As recently reported, a new tax on land transactions, replacing stamp duty, will be introduced on December 1, 2003. Non-payment of stamp duty land tax (SDLT) will be a crime. Avoidance will not, but one would be forgiven for thinking the Inland Revenue (IR) believes otherwise. With righteous zeal it has been busy second-guessing the measures which professional advisers and tax planners might dream up to reduce the tax which their clients would have to pay.
For example, the longer the lease, the higher the tax*. So why not take a short lease with an option to renew? The IR says that a second lease will be regarded as an extension of the first lease and tax will be payable on the second lease.
First take the lease for a short term and then "hold over", exercising the business tenant's right of security of tenure. The IR says the period after the expiry date will be regarded as a new term of 12 months and tax will be due on the rent.
Take a lease for 20 years, but initially at a reduced rent, then review the rent to open market level after two or three years. The IR is going to charge tax on the rent if it is reviewed during the first five years, so it will re-open the assessment and even charge where there are later reviews to substantially higher figures. The tenant will then have the privilege of having a rent increase and a tax charge as well.
Gear the rent to turnover rather than pay a full market rent. Tax will be estimated at the start and you will have to make another SDLT return at the fifth year so that tax can be recouped if the actual payments have been higher than estimated.
Assignees of an existing lease will not normally pay tax (unless there is a price payable to the seller), except where there have been upwards adjustments to the rent during the seller's ownership. In particular, a sale at the fifth year could result in a charge if a rent review pushed the value of the agreement (re-assessed) above the £150,000 threshold. No doubt buyers in these cases will want the seller to make the tax return and pay or at least share the tax.
Where a lease was exempt from tax (perhaps because it was granted to a charity), a later non-exempt buyer will find that tax becomes chargeable.
Of particular concern to pub lessees may be the rule that some obligations in leases will be treated as services to the lessor which are "chargeable considerations".
We do not yet know the full details, but it is worrying that trading covenants, under which a tenant has to buy a certain barrelage from a supplier, might increase the tax payable on the lease. As with the rent review charge, this would be a double-whammy. The test will be, it seems, whether the obligation affects the rent the tenant is paying.
As a free-of-tie lease is taken to be more valuable to a tenant than a tied lease, the tie may be taxable as a factor which is of value to the landlord.
Finally, remember that all agreements from December 1 onwards will be subject to SDLT, so that, particularly in the case of a new lease, it would be very wise to complete before the deadline.
*There is a threshold up to which no tax is payable. In the case of commercial properties the figure is a net present value (NPV = rent x years of the term) of £150,000.
Therefore a lease for three years at £50,000 per annum would not be chargeable (3 x £50,000 = £150,000). A lease for four years would be charged only on the excess above £150,000, ie £50,000.
It will be interesting to see whether it will be possible to attribute a percentage of value to the residential element of a pub, as happens with VAT, where a proportion of 10 per cent is accepted. The threshold for residential properties is a net present value of £60,000.