Guidance around the application of Land Transaction Tax in relation to leases.

Organisation:
First published:
29 March 2018
Last updated:

LTTA/4010 Introduction

It should be noted that LTT is not charged on the net present value (‘NPV’) of the rents payable on the grant of a residential lease; the tax is only payable on the NPV of rents payable on the grant of non-residential and mixed leases. Special rules apply where rent paid on the grant of a mixed lease (a lease that includes both residential and non-residential property). Therefore, except where expressly stated, references to a lease should be read to mean a lease for non-residential property.

There are specific charging rules in LTT in relation to non-residential leases which result, on the grant of a lease, in both the rent payable and any consideration other than rent (commonly a premium) being charged to tax. For an assignment of a lease, generally, only the consideration given to acquire the lease is chargeable. This is because the rents will, in the main, have been taxed already (if they are above the 0% rate band for rents). Specific rules apply to charge an assignment as though it were the grant of a lease.

A lease is:

  • an interest or right in or over land for a term of years, or
  • any interest or right in or over land that can be ended by a notice of termination or immediately.

However, both a licence to occupy land and a tenancy at will are exempt interests and therefore not chargeable to LTT.

LTTA/4020 Calculation of tax chargeable

(Part 5 Schedule 6)

Tax chargeable in respect of consideration other than rent

(paragraph 33)

Amounts paid as premium or other amounts paid as consideration other than rent for the grant or assignment of a lease are charged to LTT under the rules applicable to such consideration.

Where the grant of a lease or (where appropriate) an assignment of a lease that is to be treated as a grant of a lease, consists of both a consideration other than rent, and rents, the tax calculated under the relevant rules in respect to both are added together to create the amount that the taxpayer must self-assess. It should be noted that in certain cases the 0% rate band for consideration other than rent is removed from the calculation of tax.

Tax chargeable in respect to rent

(paragraph 29)

The amount of tax chargeable in respect of rent for a non-residential or mixed lease is calculated using 3 steps:

  • step 1 – calculate the net present value (‘NPV’) of the rent payable over the term of the lease
  • step 2 – for the amount of NPV rent falling into each tax band multiply that amount by the tax rate for that band
  • step 3 – add together the amounts for each tax band to give the total amount due.

The calculation for establishing the amount of NPV can be found at paragraph 31 to Schedule 6 LTTA and for the temporal discount rate at paragraph 32 of that schedule.

It should be noted that in certain cases the 0% rate band for consideration other than rent is removed from the calculation of tax.

Example 1

A Ltd is granted a lease for 10 years, for no premium and NPV rents of £100,000. The transaction is not linked to any other transaction. That amount is in the 0% rate band, therefore £100,000 x 0% = £0.

Example 2

B Ltd is granted a lease for 10 years, for no premium and NPV rents of £500,000. The transaction is not linked to any other transaction. The amount of NPV in the 0% rate band is £150,000, and the amount in the 1% band is £350,000. The tax chargeable is therefore £350,000 x 1% = £3,500.

Example 3

C Ltd is granted a lease for 10 years, for no premium and NPV rents of £3,000,000. The transaction is not linked to any other transaction. The amount of NPV in the 0% rate band is £150,000, the amount in the 1% band is £1,850,000 (as the band is for rents more than £150,000 but not more than £2,000,000), and the amount in the 2% band is £1,000,000 (the rent so far not in any other band). The tax chargeable is therefore £1,850,000 x 1% = £18,500, and £1,000,000 x 2% = £20,000. The total tax payable is therefore £38,500.

Tax chargeable in respect of consideration other than rent: no 0% band for non-residential leases

(paragraph 34) 

Where a lease is granted, or treated as granted, for consideration of both rent and consideration other than rent, then if the amount of the annual rent is £9,000 or greater the 0% band for consideration other than rent does not apply to the premium etc.

Example 1

A Ltd acquires a 10-year lease under the following terms; an annual rent of £3,000 plus consideration other than rent of £200,000. The NPV of the rents is £24,949. The annual rent is less than the amount of £9,000 so the rule is not triggered. Both the nil rate band for rent, and the nil rate band for consideration other than rent are available. Therefore, as the rents are in the 0% band there is no tax payable on that part of the consideration. The consideration other than rent is of an amount greater than the 0% band. The tax payable on that part of the consideration is £150,000 x 0% = £0 plus (£200,000-£150,000) x 1 % = £500. The LTT due is therefore £500.

Example 2

B Ltd acquires a 10-year lease under the following terms; an annual rent of £15,000 plus consideration other than rent of £200,000. The NPV of the rents is £124,749. The annual rent is equal to or more than the amount of £9,000 so the rule is triggered. The 0% band for rent is available but the 0% band for consideration other than rent is not available. The rents are in the 0% band there is no tax payable on that part of the consideration. The consideration other than rent is taxed as though the 1% band applied to consideration from not less than £0 to not more than £250,000. The tax payable on that part of the consideration is £200,000 x 1% = £2,000. The LTT due is therefore £2,000.

Example 3

C Ltd acquires a 10-year lease under the following terms; an annual rent of £30,000 plus consideration other than rent of £200,000. The NPV of the rents is £249,498. The annual rent is more than the amount of £9,000 so the rule is triggered. The 0% band for rent is available but the 0% band for consideration other than rent is not available. The rents payable are above the 0% band so there will be tax payable on this part of the consideration. The tax on the rents is £150,000 x 0% = £0 plus (£249,498-£150,000) x 1% = £994. The consideration other than rent is taxed as though the 1% band applied to consideration from not less than £0 to not more than £250,000. The tax payable on that part of the consideration is £200,000 x 1% = £2,000. The LTT due is therefore £2,994 (£994 + £2,000).

Tax chargeable in respect of consideration other than rent: no 0% band for mixed leases

(paragraph 35)

Where the lease is for both residential and non-residential property, and there is consideration other than rent given, the lease is treated as though it were 2 separate but linked leases, one for residential property and one for non-residential property.

The rent payable in respect of the residential and non-residential property must be apportioned, on a just and reasonable basis, to determine whether the rent attributable to the non-residential property is greater than £9,000. This is the case where the rent is expressed as a single figure, but also where the lease specifies the rent payable for each property type. This ensures that the substance of the transaction is correctly taxed.

However, it should be noted that, for the purposes of calculating the tax due, the entire amount of rent is treated as chargeable consideration because the lease is a mixed lease by virtue of the 2 leases being linked.

Example

Ms A is granted a lease on a 2-storey building. The top floor is a single residential property and the ground floor is a shop. The consideration given in the lease is £250,000 premium and annual rent of £25,000 per annum (with an NPV of £300,000). The lease does not set out the split between the consideration given for residential and the non-residential part of the property.

The rules require the transaction to be split into 2 separate but linked transactions; one that is for the residential property and one that is for the non-residential property.

The just and reasonable split between the residential part and the non-residential part is 1/5 for the residential part and 4/5 for the non-residential part.

The annual rent attributable, on a just and reasonable apportionment, to the non-residential rent is £25,000 x 4/5 = £20,000. This is greater than £9,000; therefore, the 0% band is not available for the consideration other than rent, in respect of the non-residential transaction.

The consideration other than rent, in respect of the non-residential transaction is £250,000 x 4/5 = £200,000. The consideration other than rent, in respect of the residential transaction is £250,000 X 1/5th = £50,000.

The linked transaction rules for consideration other than rent apply. The non-residential rates and bands apply as the transaction includes both residential and non-residential property.

The total tax due on the residential transaction under the linked transaction rule is treated as follows: The total consideration other than rent is £250,000. The 0% band for consideration other than rent for non-residential property applies. The tax payable is therefore £150,000 x 0% = £0, plus (£250,000-£150,000) x 1 % = £1,000. The relevant fraction from the just and reasonable split is 1/5, so the LTT in respect of the residential property is £200 (£1,000 X 1/5th = £200).

However, as explained above, the 0% band for consideration other than rent, is not available for the non-residential property (as the rent, justly and reasonably apportioned, is equal to or more than £9,000). The total tax due on the non-residential property under the linked transaction rule is £2,500 (£250,000 x 1%), the relevant fraction is 4/5 resulting LTT for the non-residential transaction is £2,000 (£2,500 X 4/5ths = £2,000).

The NPV is not apportioned between the residential and non-residential transactions for the purpose of calculating the tax due as the transaction is treated as a mixed lease. The LTT due on the NPV of the rents, based on the non-residential and mixed use table for rents is therefore £1,500 (£0 to £150,000 x 0% plus £150,001 to £300,000 x 1%).

The total tax due on this transaction is £3,700 (£200+£2,000+£1,500).

Tax chargeable in respect to rent: linked transactions

(paragraph 30)

Where the lease is a non-residential or a mixed lease and is one of a number of linked transactions, the amount of tax chargeable is calculated using the following steps:

  • step 1 – calculate the total of the net present values (‘TNPV’) of the rent payable over the terms of the linked leases,
  • step 2 – for each band applicable to the acquisition multiply so much of the TNPV that falls into each band by the tax rate for that band,
  • step 3 – calculate the total of the amounts reached under step 2. The result is the total tax chargeable in respect of rent for the linked leases,
  • step 4 – divide the NPV of the rent payable over the term of the lease in question by the TNPV, 
  • step 5 – multiply the total tax chargeable in respect of rent by the fraction reached under step 4,

the result is the amount of tax chargeable in respect of rent for the lease in question. 

Example

A Ltd is granted a lease on a non-residential property by B Ltd. A Ltd indicates that it also wants to rent a second property from B Ltd. The particular facts of the case make the grant of the 2 leases linked even though they are separated by time. The NPV on the first lease is £250,000 and the tax chargeable is £1,000. The grant of the second lease is a linked transaction. The NPV for the second lease is £300,000.  

Following the steps set out above the tax liability is:

  • step 1 – TNPV is £550,000
  • step 2 – using the rates and bands in force at 1 April 2018 the tax liability is £0 to £150,000 x 0% = £0, plus, £150,001 to £550,000 x 1% = £4,000,
  • step 3 – the sum of the amounts in step 2 total £4,000.
  • step 4 – the lease in question (the second lease) has an NPV of £300,000. This is divided by the TNPV. Therefore the sum is 300000/550000, giving a fraction of 6/11.  
  • Step 5 – multiply the total tax by the fraction - £4,000 x 6/11 = £2,181.  

The return for the most recent lease should self-assess a liability of £2,181. A further return for the earlier lease should also be sent by the filing date for the newly granted lease. This further return will need to use the same calculation a above for steps 1 to 3. Step 4, however, will use 250000/550000 to establish the fraction of 5/11. Step 5 will establish a liability of £1,818. As £1,000 was self-assessed and paid on the filing of the first return for this transaction the further return will need to self-assess the £818 additional LTT now due on that transaction.

LTTA/4030 Duration of Leases and overlapping leases: fixed terms, continuing leases, grant of new lease, indefinite terms, successive leases etc.

(Part 2 Schedule 6)

Lease for a fixed term

(paragraph 2 Schedule 6)

If the lease is for a fixed term, that has a stated commencement and termination date (or where those dates can be established) then any contingency or right that could result in the lease being terminated before that termination date, or any right to renew the lease, are not taken into account in establishing the tax charge.

A lease for a fixed term can be expressed either as ‘from’ a date or ‘from and including’ a date. Therefore, a lease with a term of 10 years from 25 March 2020 begins on 26 March 2020 and ends on 25 March 2030. Whereas a lease with a term of 10 years from and including 25 March 2020 begins on 25 March 2020 and ends on 24 March 2030.

Example

A Ltd is granted a lease for 10 years from and including 1 January 2020. The landlord B Ltd has a right to terminate the lease on 31 December 2024 so long as notice is given before 30 September 2024. Despite this right to terminate, the lease will be treated as being for 10 years.

Leases that continue after a fixed term

(paragraph 3 Schedule 6)

Leases granted for a fixed term ‘and thereafter until determined’ or for a fixed term that may continue beyond the fixed term ‘by operation of law’ are treated for LTT purposes as being for the fixed term stated on grant. Such leases include business tenancies within Part II of the Landlord and Tenant Act 1954 (‘LTA54’) which normally continue beyond the contractual term, until they are terminated or a new tenancy is granted.

A lease will not automatically continue beyond its contractual term if, for example, a business tenancy is contracted out of LTA54 or a business tenant loses the right to renew the lease. In many cases, a tenant remaining in occupation at the end of the contractual term of such a lease may, in strictness, be trespassing, or there may be a tenancy at will or a contractual license. If the tenant remains in occupation under these circumstances then there are no LTT implications and additional tax is not chargeable during the period the taxpayer remains in occupation.

However, there are LTT implications in cases where the lease is treated as continuing beyond its contractual term and rent remains payable, for example:

  • A business tenancy within Part II LTA54 normally continues beyond its contractual term until it is terminated or a new tenancy is granted.
  • At the end of a business tenancy which is contracted out of Part II LTA54, or where the right to renew is lost, a new implied lease may arise.
  • For most residential shorthold tenancies granted for an initial fixed term, the end of the contractual term is followed by a statutory periodic tenancy.

These leases are treated for LTT purposes as being for one year longer than the original term, irrespective of any other rule or operation of law which determines that they should be extended for a longer or shorter period.

Leases are therefore treated as:

  1. Running for the length of the original fixed term.
  2. If the lease continues after the end of the fixed term it is treated as a lease for a fixed term of one year longer than the original fixed term.
  3. If the lease continues after this one year extension, it is treated as being extended by another year and so on until either a new lease is granted or the lease is determined.
  4. If the lease actually terminates during any part year during the further periods set out in point 2 and 3 above, then the lease is treated as continuing to that termination date.

Where the increased net present value of the extended lease gives rise to a charge or additional charge to LTT, a return or further return is required. That return or further return must be made within 30 days of the day after the end of that extended period. The tax liability is based on the rates and bands in force at the date that the lease was initially granted (i.e. the effective date for the transaction).

Example

A Ltd was granted a 5-year lease for a non-residential property commencing on 1 January 2020. The transaction is notifiable and a return is submitted. A Ltd stays in occupation following the end of the fixed period expressed in the lease (31 December 2024). At 31 December 2025 A Ltd is still in occupation and is now under an obligation to send in a further return by 30 January 2026 the additional tax will be calculated by treating the lease as though it was one originally for 6 rather than the original 5 years. The result of that calculation is deducted from the tax originally assessed to establish the additional amount payable. A Ltd continues in occupation and is still in occupation on 31 December 2026. A further return therefore needs to be submitted by 30 January 2027 with the additional tax calculated as though the lease were a 7 year lease. On 30 June 2027 the lease is terminated. A Ltd must therefore make a further return by 30 July 2027 with the additional tax calculated as though the lease were 7 years and 181 days long (i.e. from 1 January 2020 to 30 June 2027).

It should be noted that leases for a fixed term that commenced under SDLT remain taxable to SDLT when they continue at the end of that fixed term.

Leases that continue after a fixed term: grant of a new lease

(paragraph 4 Schedule 6)

Where the taxpayer has continued in occupation and the lease is treated as continuing after the fixed term for one, or more than one, year longer than the original fixed term but:

  • during any relevant one-year extended period the tenant is granted a new lease of the same, or substantially the same, premises
  • the term of that new lease begins in that year, and 
  • the provisions relating to tenant holding over: new lease backdated to previous year do not apply

then the lease is not treated as continuing for that one-year extended period (or part of that one year), but rather the term of the new lease is treated as beginning with the day after the original fixed term ended (or any full year extended period as appropriate). This would be the lease start date.

Rent that is payable under the original lease in respect of that one-year (or part thereof) period is to be treated as payable under the new lease.

Example

A Ltd is granted a lease for a non-residential, from and including 1 April 2020 for a period of 3 years at an annual rent of £120,000 (payable quarterly). At the end of that fixed term (31 March 2023) A Ltd remained in occupation and continued to pay the same rent to its landlord. At 1 April 2024 A Ltd is still in occupation. It must make a further return to WRA by 30 April 2024 to pay the additional tax due on what is now treated as the grant of a 4-year lease. On 1 July 2024 A Ltd is granted a new 3-year lease, at £150,000 annual rent, by its landlord that commences from and includes 1 July 2024. As the new lease is granted in a year in which the original fixed term lease is treated as extended (and is not backdated to a previous year), the new lease is deemed to have commenced on 1 April 2024 and ending on 30 June 2027. It is therefore the grant of a lease for 3 years and 91 days. The rent for the first year of the lease will be £29,917 (the 91 days of the old lease rent of £120,000) plus £112,602 (274 days of the new lease annual rent of £150,000), a total of £142,519. The 2nd and 3rd year rents are £150,000 each and the final 3 months of rent is £37,397 (91/365x£150,000). The return for the newly granted lease must be made by 31 July 2024 (i.e. 30 days after the effective date of the transaction – the grant of the lease).

Leases for an indefinite term

(paragraph 5 Schedule 6)

A lease for an indefinite term, that is any lease where the term of the lease cannot be solely ascertained from the wording of the lease or some other ancillary document (e.g. a periodic tenancy or a lease for life), is treated, when first granted as a lease for a fixed term of one year. If the lease should continue beyond the first year then it is treated as though it were a lease for a fixed term of 2 years. If it continues beyond the second year it is treated as a lease for a fixed term of 3 years and so on.

However, where a lease is not notifiable then the rules above will not apply until such point as the lease does become notifiable (for example if the term has reached 7 years, or there is tax chargeable at a rate of more than 0% etc.). It should be noted that a lease for an indefinite term is treated, when granted, as a lease for less than 7 years.

The filing obligations that a taxpayer is under will depend upon whether the grant of the lease is notifiable, or becomes so due to subsequent yearly extensions.

If the grant of the lease for an indefinite term (which is treated as a lease for a fixed term of one year) is a notifiable transaction, then the taxpayer must send a return to WRA before the end of the period of 30 days beginning with the day after the effective date of the transaction. When there is a lease extension, then the taxpayer is under an obligation to send in that additional return before the end of the period of 30 days beginning with the day after the end of the longer term for which the return is treated as continuing.

If the land transaction only becomes notifiable due to a lease extension for a year at a later date, then the filing obligation arises at that point.

Example 1

A Ltd is granted a lease for an indefinite term that starts on 1 January 2020. It is notifiable, therefore A Ltd is under an obligation to make a return by 31 January 2020. That lease continues for a 2nd year. At the end of that second year the taxpayer is under an obligation to make a return (and pay the additional tax due), by 30 January 2022, i.e. before the end of 30 days following the end of the longer fixed term of one year. This rule then applies at the end of the 3rd year etc.

Example 2

B Ltd is granted a lease for an indefinite term that starts on 1 January 2020. It is not notifiable at that point because the lease is treated as being for less than a term of 7 years and there is no tax payable. The lease continues but, at the end of the second year it remains not notifiable. The lease continues for a 3rd year and at the end of that 3rd year the lease is notifiable because there is tax to pay based on the NPV of the 3 years rents. The taxpayer must therefore send in a return, and pay the tax due, by 30 January 2023. If the lease continues for further years then an annual obligation to make a return will arise.

In the event that the lease is treated as a lease for a fixed term of 2 or more years, and it terminates in the extended period; then the lease is treated as extended only until that date, and that date of termination creates an obligation on the taxpayer to make a return (if the land transaction is notifiable). This means that a lease that is granted for an indefinite term is treated, on grant, as having a term of at least one full year (but see below for cases where the lease terminates during that first year) and thereafter the taxpayer is assessed on the actual length of the term.

Example 3

C Ltd is granted a lease for an indefinite term that starts on 1 January 2020. The lease is for an annual rent amount of £100,000, and there is no consideration other than rent. The land transaction is, at this point not notifiable as the term is for less than 7 years and there is no tax payable and no relief has been claimed. The lease continues for a further year and is now a notifiable transaction as LTT is payable on the NPV of the 2 years rents. The taxpayer must make this return, and pay the tax, by 30 January 2022. On 30 June 2022 the lease terminates. The taxpayer is under an obligation to make a return to cover this further 6-month period and pay the necessary additional tax by 30 July 2022 (i.e. 30 days after the extended period ends).

In the event that a lease for an indefinite term terminates in the first year, and less tax would be payable as a result, then the taxpayer may amend their return within the period provided by TCM to make such an amendment.

Example 4

D Ltd is granted a lease for an indefinite term that starts on 1 January 2020. The rent payable is £366,000 for that first year (i.e. £1,000 per day). The land transaction is notifiable and D Ltd must make a return and pay LTT based on the net present value of £353,623 by 31 January 2020. On 30 September 2020 the lease is terminated. The taxpayer may, by 31 January 2021, amend their return to show a NPV rent of £264,734, and claim repayment of the overpaid tax.

LTTA/4040 Successive leases

(paragraph 6 Schedule 6)

Successive leases that are not successive linked leases

A series of leases will often exist between the same parties; for example, where a short lease is renewed between the same tenant and landlord. A renewal lease will be treated as linked with the original lease if, for example, the rent was fixed under the terms of the original lease or is stated to be the same as that payable under the original lease.

However, the renewal of a lease will not be treated as linked with the original lease at all for LTT purposes if it can be shown (with appropriate evidence) to have been negotiated at arm’s length, for example if the original or earlier lease:

  • expired naturally
  • contained no right or compulsion of either party to renew, and/or
  • was renewed following entirely new negotiations, as would apply to a new tenant.

Successive linked leases

However, where leases of the same premises are granted:

  • between the same or connected parties
  • to take effect one immediately after the other
  • whether at the same time or not

these are successive linked leases for LTT purposes, with tax calculated as though the series of linked leases were a single lease. LTT is calculated as though the series of leases were one lease:

  • granted at the time the first lease in the series was granted
  • for a term equal to the aggregate of terms of all the leases in the series, and
  • in consideration of the rent payable under all of the leases in the series.

Example

A Ltd is granted a 3-year lease on 1 January 2020 for a rent of £70,000 per annum and includes in its terms the right to renew the lease for the same rent on expiry. There is no consideration given other than rent. On 1 January 2023 a new 3-year lease is granted between the same parties on the same terms. These are successive leases and LTT is calculated as though the series of leases were one lease:

  • granted at the time the first lease in the series was granted (1 January 2020)
  • for a term equal to the aggregate of terms of all the leases in the series (6 years), and
  • in consideration of the rent payable under all of the leases in the series (£70,000 per annum).

A Ltd’s filing obligations are for a return to be made by 31 January 2020 which is calculated on the NPV of £210,000 for a 3 year lease, and for a further return to be made by 31 January 2023 which will be calculated on the NPV of £420,000 for a 6 year lease. Only the additional tax will be payable for the further return.

Linked leases that are not successive linked leases

Transactions are defined as ‘linked’ for the purposes of LTT if they form:

  • a single scheme, arrangement, or
  • a series of transactions

between the same parties (or connected persons).

In the case of leases, the tax treatment differs depending on whether they are linked by way of a single scheme or arrangement or as a series of leases (‘successive’ linked leases).

Where, as a matter of fact, leases of 2 or more properties are negotiated as a single bargain between the same or connected parties, the transactions will be treated as linked for LTT purposes. If the special provisions for successive leases do not apply (see above), then tax on linked leases is calculated using special rules.

Linked leases: Calculation of tax liability

Where leases are linked for LTT purposes but the special provisions for successive leases do not apply (see above), then the rules for calculating LTT are modified as follows:-

  • Calculate the total tax that would be chargeable on the first lease if the linked transactions were a single transaction:
    • Calculate net present value (NPV) of first lease (NPV1)
    • Aggregate NPV1 with NPV of second lease (NPV2) to give total net present values (TNPV) of rent payable over the terms of both leases. This is the relevant rental value;
    • Calculate the total tax chargeable on the TNPV using the threshold relevant at the date of grant of the first lease
    • Calculate the element of this total amount of tax which relates to the first lease by applying the fraction: NPV1 ÷ TNPV to the total tax chargeable on the TNPV
  • Calculate the total tax that would be chargeable on the 2nd lease if the linked transactions were a single transaction:
    • Calculate net present value (NPV) of 2nd lease (NPV2)
    • Aggregate NPV1 with NPV2 to give TNPV of rent payable over the terms of both leases. This is the relevant rental value
    • Calculate the total tax chargeable on the TNPV using the threshold relevant at the date of grant of the second lease
    • Calculate the element of this total amount of tax which relates to the second lease by applying the fraction:
    • NPV2 ÷ TNPV to the total tax chargeable on the TNPV

The 2 separate tax calculations are needed to apply the LTT rates and thresholds appropriate to each lease. The leases are linked, and the NPVs of rents aggregated, for the purposes of applying the relevant thresholds and rates fairly and proportionately. Where there is a third etc. linked lease then the rules are applied in the same manner to those leases.

LTTA/4050 Rent for overlap period in case of grant of further lease

(paragraph 7 Schedule 6)

Where:

  • a lease is surrendered (or treated as surrendered) and, as consideration for the surrender, a new lease is granted for the same or substantially the same premises
  • a tenant under a lease to which Part 2 of the Landlord and Tenant Act 1954 applies requests a new tenancy which is then executed
  • a head lease is terminated and a sub-tenant is granted a new lease for the same or substantially the same premises as the sub-tenant held previously because of the order of a court or a contractual entitlement arising from the head lease being terminated
  • a guarantor for a tenant whose lease has been terminated is, in pursuance of the guarantee, granted a lease for the same or substantially the same premises
  • a lease of a building which is varied, for example, where additional floors are added to a building held on the old lease such that the variation gives rise to a surrender and re-grant of the lease.

For the purposes of calculating the net present value (NPV) of rents under the new lease, any rent payable under the new lease for any period falling within the overlap period is reduced by the rent which would have been payable (and has already been taken into account for LTT, or SDLT for transitional rules, return purposes) for the overlap period.

However, the reduction of the rents payable due to the overlap relief does not, potentially, result in no tax being payable for the new lease due to the normal rule that rents are calculated on the highest rent paid in any 12-month period in the first 5 years. This is because otherwise it would be possible for a lease to be granted for 10 years, tax paid on the NPV rents, and then that lease surrendered and re-granted at, say, year 3 for a considerably longer time but with the same rent. As overlap relief would be available for the first 5 years of the new lease (effectively meaning rent payable in the first 5 years was £0 per annum for the new lease) that £0 rent would be treated as the rent for the whole of the term of the new lease. The rules, however, do not permit that to occur, and whilst overlap relief is properly given for the years that have already been assessed to LTT, the later years where ‘new’ rent is payable will still attract LTT on the NPV of the rents.
    
The overlap period is the period common to the terms of both the new and old lease. It is the period from the date that the new lease is granted to the date that the old lease would have ended (for LTT purposes) had it not been terminated. This includes extensions to lease terms following the end of a fixed term, or an indefinite lease.

The rent which would have been payable under the old lease is that which was taken into account in calculating NPV for LTT self-assessment on the acquisition of the old lease.

Overlap relief cannot reduce the rent payable under the new lease to a negative amount. In other words, the amount of rent to be used in the NPV calculation for any year cannot be less than nil.

It should be noted that:

  • Overlap relief is available where the old lease was subject to SDLT under the transitional rules or LTT. Where the old lease was subject to stamp duty, all rent payable under the new lease should be included in the NPV calculation for the new lease, irrespective of any overlap period, because no rent has been taken into account for SDLT or LTT purposes
  • No overlap relief is available where a lease was the subject of an SDLT or LTT exemption, or relief has been claimed, and is subsequently surrendered and replaced by a new lease which does not meet the conditions for relief. No rent was taken into account in determining the amount of tax due on the first lease so there can be no entitlement to this relief
  • Where the rent is variable then overlap relief is disregarded and the ‘highest rent’ is the rent determined before any reduction for overlap relief.

Example 1

A Ltd is granted a lease on a non-residential property on 1 April 2020. The term of the lease is for 5 years (contractual termination date is 31 March 2025). When the lease terminates, A Ltd remains in occupation. A new lease is granted on 1 October 2027 for the same premises for a further 5 years with the term expressed as starting on 1 April 2025. The relevant conditions are all met: the tenant remained in occupation following termination of the lease (31 March 2025), a new lease is granted for the same property, the date of grant (1 October 2027) is more than one year after the contractual termination date, and the lease is expressed as beginning on a date that is between the contractual termination date and the and the latest anniversary of that date (31 March 2027).

A Ltd will have made its first return for the grant of the old lease on or before 1 May 2020. When it remained in occupation of the property following the termination of the lease it will have made a return for the first full year (1 April 2025 to 31 March 2026) of its continued occupation on or before 30 April 2026. It will also have had to make a return for its second full year of occupation by 30 April 2027. Both these returns must be made in line with the requirements for leases that continue after a fixed term. No return under the leases that continue after a fixed term rules is required for the period 1 April 2027 to 1 October 2027 as the rent payable in this period has not yet been taxed and it will be taxed in the return for the new lease. The return for the new lease will be for the period of 5 years commencing on 1 April 2025 and ending on 31 March 2030. The taxable rents assessed for the 2 years ended 31 March 2027 are deducted from the rents payable for the 2 years of the new lease (so long as that does not result in negative figure). The rents for the remaining 3 years of the new lease will be based on the rents payable under the terms of that new lease.

Overlap Relief: Rent taken into account

What is included in the term ‘rent taken into account’ on completion of a lease following substantial performance?

LTT is due on substantial performance of an agreement for lease, based on the rents for the first 5 years. If the rent increases in year 6 it is ignored in the calculation of the NPV.

Where a lease is subsequently granted after substantial performance, if there have been no changes to the terms of the lease (i.e. by variation etc.) the increased rent in year 6 has been ‘taken into account’ on substantial performance in relation to the grant of the lease.

Therefore, if there are no changes between substantial performance and completion there can be no additional LTT to pay.

Example 1

A Ltd is granted a lease on 1 April 2020 for 25 years (the ‘old lease’). The terms of the lease are:

  • the date of expiry is 31 March 2045
  • rent of £144,000 per annum is payable under this old lease
  • there is no consideration other than rent
  • the net present value (NPV) of the old lease is £2,373,337
  • LTT is payable on the NPV figure (subject to any nil rate band).

The old lease is surrendered and a new lease is granted on 1 April 2024 for 150 years. The terms of the new lease are varied from the old lease so that rent of £110,000 per annum is now payable. Again, there is no consideration other than rent.

The tax payable under the new lease, (and allowing for the overlap relief) is established as follows:

  1. The overlap period is calculated – in this case it is from 1 April 2024 until 31 March 2041, that is, 21 years 
  2. The annual rent payable under the new lease is established – in this case it is £110,000  
  3. The rent payable under the old lease is established – in this case £144,000. This is the amount included in the first NPV calculation
  4. The new lease is not a lease with variable rent. Therefore, the rent is known and the NPV calculation should use rent of £0 for years 1 to 21 inclusive (as the old rent is more than the new rent but the figure to be included in the calculation cannot be less than £0) and rent of £110,000 for years 22 to 150 inclusive to give a NPV of £1,508,038. The additional LTT is calculated on that NPV amount using the rates and thresholds for the date of the grant of the new lease.

Example 2

B Ltd is granted a lease on 1 April 2020 for 25 years (the ‘old lease’). The terms of the lease are:

  • the date of expiry is 31 March 2045
  • rent of £144,000 per annum is payable under this old lease
  • net present value (NPV) of the old lease is £2,373,337
  • there is no consideration other than rent
  • LTT is payable on the NPV figure (subject to any nil rate band).

The old lease is surrendered and a new lease granted 1 April 2024 for 150 years. The terms of the new lease are varied from the old lease so that rent of £175,000 per annum is now payable. Again there is no consideration other than rent.

The tax payable under the new lease (and allowing for the overlap relief) is established as follows:

  1. The overlap period is from 1 April 2024 until 31 March 2045, that is, 21 years.
  2. The rent payable under the new lease is £175,000.
  3. 3.The rent payable under the old lease is £144,000. This is the amount included in the first NPV calculation.
  4. The new lease is not a lease with variable rent. Therefore, the NPV calculation should use rent of £31,000 for years 1 to 21 inclusive (being new rent £175,000 less old rent £144,000) and rent of £175,000 for years 22 to 150 inclusive to give a total NPV of £2,854,789. The additional LTT is calculated on that NPV amount using the rates and thresholds for the date of the grant of the new lease.

Example 3

C Ltd is granted a lease on 1 April 2020 for 25 years (the ‘old lease’). The terms of the lease are:

  • the date of expiry is 31 March 2045
  • rent of £144,000 per annum is payable under this old lease
  • net present value (NPV) of the old lease is £2,373,337
  • there is no consideration other than rent
  • LTT is payable on the NPV figure (subject to any nil rate band).

The old lease is surrendered and a new lease is granted on 1 October 2024 for 150 years. The terms of the new lease are varied from the old lease so that rent of £110,000 per annum is now payable. Again, there is no consideration other than rent.

The tax payable under the new lease (and allowing for the overlap relief) is established as follows:

  1. The overlap period is from 1 October 2024 until 31 March 2045, that is, 21 years and 6 months.
  2. The rent payable under the new lease is £110,000.
  3. The rent payable under the old lease is £144,000. This is the amount included in the first NPV calculation.
  4. The new lease is not a lease with variable rent. Therefore, the NPV calculation should use rent of £0 for years 1 to 20 inclusive (as the old rent is more than the new rent but the figure to be included in the calculation cannot be less than £0), £55,000 for year 21 (as the first 6 months of this year are in the overlap period comparison is made on a month by month or day by day basis to calculate the overlap relief. In the first 6 months of this year, the old rent is more than the new rent but the figure to be included in the calculation cannot be less than £0 for this 6 months. In the following 6 months the rent payable under the new lease is £55,000 and there is no overlap. Thus, the rent to include in the calculation for year 21 of the new lease is £0 + £55,000 = £55,000) and rent of £110,000 for years 22 to 150 inclusive to give an NPV of £1,534,745. The additional LTT is calculated on that NPV amount, using the rates and thresholds for the date of the grant of the new lease.

Example 4

D Ltd is granted a lease on 1 April 2020 for 25 years (the ‘old lease’). The terms of the lease are:

  • the date of expiry is 31 March 2045
  • rent of £144,000 per annum is payable under this old lease
  • the net present value (NPV) of the old lease is £2,373,337
  • there is no consideration other than rent
  • LTT is payable on the NPV figure (subject to any nil rate band).

The old lease is surrendered and a new lease is granted on 1 October 2024 for 150 years. The terms of the new lease are varied from the old lease so that rent of £175,000 per annum is now payable. Again, there is no consideration other than rent.

The tax payable under the new lease (and allowing for the overlap relief) is established as follows:

  • The overlap period is from 1 October 2024 until 31 March 2045, that is, 21 years and 6 months.
  • The rent payable under the new lease is £175,000.
  • The rent payable under the old lease is £144,000. This is the amount included in the first NPV calculation.
  • The new lease is not a lease with variable rent. Therefore, the NPV calculation should use rent of £31,000 for years 1 to 20 inclusive (being new rent £175,000 less old rent £144,000), £103,000 for year 21 (as the first 6 months of this year are in the overlap period, comparison is made on a month by month or day by day basis to calculate the overlap relief. In the first 6 months of this year, the new rent is £87,500 less old rent of £72,000 to give £15,500. In the following 6 months the rent payable under the new lease is £87,500 (£175,000 / 12 months X 6 months) and there is no overlap. Thus, the rent to include in the calculation for year 21 of the new lease is £15,500 + £87,500 = £103,000) and rent of £175,000 for years 22 to 150 inclusive to give NPV of £2,889,750. The additional LTT is calculated on that NPV amount using the rates and thresholds for the date of the grant of the new lease.

Example 5

E Ltd is granted a lease on 1 April 2020 for 25 years (the ‘old lease’). The terms of the lease are:

  • the date of expiry is 31 March 2045
  • initial rent of £144,000 per annum is payable under this old lease
  • there is no consideration other than rent
  • the lease contains a provision for a rent review to higher of market rent, or passing rent, with effect from 1 April 2025 and every 5th anniversary thereafter.

The old lease is surrendered and a new lease is granted on 1 April 2024 for 150 years. The terms of the new lease are varied from the old lease so that rent of £110,000 per annum is now payable; additionally, there is no provision for rent reviews. Again, there is no consideration other than rent.

The tax payable under the new lease (and allowing for the overlap relief) is established as follows:

  1. As the rent review is after 5 years, it is ignored for the purposes of calculating the NPV. The NPV of the old lease is £2,373,337.
  2. The overlap period is from 1 April 2024 until 31 March 2045, that is, 21 years.
  3. The rent payable under the new lease is £110,000.
  4. The rent payable under the old lease is £144,000. This is the amount included in the first NPV calculation.
  5. The new lease is not a lease with variable rent. Therefore, the NPV calculation should use rent of £0 for years 1 to 21 inclusive (as the old rent is more than the new rent but the figure to be included in the calculation cannot be less than £0) and rent of £110,000 for years 22 to 150 inclusive to give NPV of £1,508,038. The additional LTT is calculated on that NPV amount using the rates and thresholds for the date of the grant of the new lease.

LTTA/4060 Tenant holding over: new lease backdated to previous year

(paragraph 8) 

Where:

  • a tenant under a lease (‘the old lease’) continues in occupation after the date the lease was to terminate (‘the contractual termination date’)
  • the tenant is granted a lease of the same or substantially the same premises (‘the new lease’)
  • the new lease is granted on a date that is more than one year after the contractual termination date, and
  • the term of the new lease begins on a date that is in the period that starts with the contractual termination date and ends with the latest anniversary date that is before the date on which the lease is granted. This period provides the ‘whole years of holdover’.

The term of the new lease is treated as beginning on the date it is expressed in the lease (lease start date).

In this case, where the return asks you to enter the effective date of the transaction, this will be the effective date of the new lease.

The rent payable under the new lease, in relation to the period which begins with the date the new lease is expressed as commencing on and ending with the last whole year of holdover, is treated as being reduced by the amount of the taxable rents paid during the holdover period. That cannot, though, create a negative rent figure.

The holdover tenancy is treated as a lease for a fixed term with a termination date that ends on the last date of a whole year holdover period. A holdover tenancy in these circumstances means: the old lease if it continues beyond the contractual termination date, or, any other tenancy of the same (or substantially the same) premises in which the tenant continues in occupation after the contractual termination date.

LTTA/4070 Rent and other consideration - lease specific consideration rules

(Part 3 Schedule 6)

Rent

(paragraph 9 Schedule 6)

Chargeable consideration for a lease or other chargeable transaction which wholly or partly consists of rent is chargeable to LTT.

Whether consideration consists of rent is a question of fact. Consideration may be treated as rent for LTT purposes despite being otherwise described; for example, as a license or fee in an agreement for lease. Conversely, a service charge may be reserved as rent in the lease but not treated as such for LTT purposes.

‘Rent’ does not include consideration payable before a new lease is granted. In most circumstances, such payments prior to the grant of the lease may be taxed as a premium.

A nominal rent is not chargeable consideration for LTT purposes if it:

  • is expressed as a peppercorn or similar, or
  • has a net present value (NPV) of less than £1.

Rent: Inclusive of services etc.

Service charges payable from tenant to landlord are not chargeable consideration for LTT purposes and are excluded from the calculation of tax as long as the payment of the service charge has been either:

  • provided for in the lease as a separate figure, or
  • expressed in the lease as part of an inclusive rent payment and apportioned on a just and reasonable basis.

The fact that a service charge is reserved in the lease as rent does not make it rent for LTT purposes.

Where apportionment of an inclusive figure is necessary, this must be made on a just and reasonable basis and will not necessarily be the same as the apportionment (if any) set out in the lease documentation.

Where a single sum is payable in respect of rent, or rent and service charges, and:

  • there is no apportionment between rent and service charge, and/or
  • the service charge is not separately provided for in the terms of the lease, then the sum is to be treated entirely as rent for LTT purposes.

Service charges are the most common item of non-chargeable consideration for a lease, but the above treatment applies equally to other non-chargeable consideration.

Example 1

A Ltd is granted a lease. The term of a lease is for 4 years with rent of £10,000 per quarter payable. The landlord has agreed that this will include payment for services, but this is not expressly provided for in the lease.

The fact that a service charge is reserved in the lease as rent does not necessarily make it rent for LTT purposes. However, in this case the service charge has not been provided for in the terms of the lease, either as a separate figure or as part of an inclusive figure of rent which is apportioned.

All the £40,000 annual rent is therefore treated as rent.

Example 2

B Ltd is granted a lease. The term of a lease is for 4 years with rent of £10,000 per quarter payable inclusive of services.

Although the rent amount is expressed in the lease as being inclusive of services, no apportionment has been made between the 2 elements.

A just and reasonable apportionment for LTT purposes need not be made in the lease itself. The landlord tells B Ltd that the services that it provides have a cost of £2,000 per quarter. The evidence indicates that a just and reasonable apportionment is therefore £8,000 per quarter for rent and £2,000 per quarter for services. B Ltd should retain the evidence on which the apportionment is based.

Therefore, the annual rent for LTT purposes is £32,000.

Example 3

C Ltd is granted a lease. The term of a lease is for 4 years with rent of £10,000 per quarter payable inclusive £2,500 for services. This represents a fair amount for services as the market rent for a similar property without services would be £7,500 per quarter.

Although the whole £10,000 quarterly is reserved as rent, a distinct amount is identified in the lease as being for services and this apportionment is on a just and reasonable basis.

The annual rent for LTT purposes is £30,000.

Example 3

D Ltd is granted a lease for 4 years with rent of £10,000 per quarter. The terms of a lease state that £6,000 per quarter are for services. However, the market rent for a similar property without services would be £8,000 per quarter.

Although the quarterly rent of £10,000 is expressed as being both for rent and services and there is an apportionment, this is not on a just and reasonable basis.  In such cases, the LTT legislation provides for tax to be calculated on the basis of a just and reasonable apportionment.

Therefore, the annual rent for LTT purposes is £32,000.

LTTA/4080 Rent for calculation of net present value

(paragraph 10)

The rent used to establish the net present value (‘NPV’) of the rents is based on the first 5 years of the lease. The NPV can be established using the calculator. Where the lease is longer than 5 years the annual amount of rent for those additional years is assumed to equal the highest rent payable in any consecutive 12-month period in that 5 years.

Example 1

A Ltd is granted a lease for a term of 10 years. The annual rent is fixed in the lease and there are no review dates for the first 3 years of £35,000 each year, the next 3 years at a rent of £45,000 each year and the final 4 years at a rent of £55,000 each year.

In calculating the NPV the first 5 years are taken into account on the basis of actual rent paid. A Ltd has paid annual rents of £35,000, £35,000, £35,000, £45,000 and £45,000. The highest rent in any 12-month consecutive period in the first 5 years is £45,000. The rent for the remaining term of the lease is based on that annual rent of £45,000. In this case the NPV is £346,230.

Example 2

B Ltd is granted a lease for a term of 10 years. The annual rent is fixed in the lease and there are no review dates for the first 2 ½ years of £40,000 per annum, the next 12 months at a rent of £70,000 (there is a significant sporting event occurring), the next 3 ½ years at a rent of £45,000 each year and the final 3 years at a rent of £50,000 each year.

In calculating the NPV the first 5 years are taken into account on the basis of actual rent paid. A Ltd has paid annual rents of £40,000, £40,000, £55,000 ((£40,000/2)+(£70,000/2)), £57,500 ((£70,000/2)+(£45,000/2)) and £45,000. The highest rent in any 12-month consecutive period in the first 5 years is £70,000. The rent for the remaining term of the lease is based on that annual rent of £70,000. In this case the NPV is £479,700.

LTTA/4090 Variable and uncertain rent: calculation of net present value

(paragraph 10)

Where the rent is uncertain, unascertainable or contingent, the taxpayer must use reasonable assumptions or estimates to determine rent for the purposes of the calculation. This will include cases where the variation provided for in the lease, cannot be quantified at the date of grant of the lease; for example, where rents are to be reviewed in line with market rents or business results at a future date. Such rents are uncertain or unascertainable. Similarly, where the rent may vary as a result of a rent review in the first 5 years, the rents will be treated as variable.

Leases may also provide for the level of rent payable to be wholly or partly dependent upon an unknown outcome, such as the granting of planning permission. Such rents are contingent. Where the rent is contingent, NPV for the first 5 years is calculated on the basis that any contingent amount will be payable (or will not cease to be payable).

The rules relating to contingent, uncertain and unascertained consideration apply equally to rents. However, if the contingency does not occur, it is not possible to amend the calculation. Also, it is not possible to apply for deferment of payment of LTT in respect of rent if some of the rent is contingent or unascertained as rent is specifically excluded from the ‘deferrable amount’ calculation.

Where the rent is to be increased in line with the retail prices index, or other index, to express inflation; that uncertain increase is ignored for the purposes of establishing the rents payable in the first 5 years of the term of the lease. In such cases the rent amount expressed in the lease, is the rent to be used to calculate the NPV. But, if the rent increases are expressed as, for example, RPI plus 2%, the whole of that rent increase is to be treated as uncertain and adjustments made.

For the purposes of calculating the NPV or the first 5 years, a reasonable estimate should be made of the amounts that will be payable. This need not necessarily be a professional valuation, but evidence of the basis of the estimate must be kept in case of an enquiry.

Example 1

A Ltd is granted a lease for 7 years. The rent for the first 3 years is fixed at £50,000. There is a rent review at the end of years 3 and 6. The rent review in year 3 concludes on 1 August (7 months into year 3). It concludes that the rent is to be £60,000 for the 3 years leading up to the next rent review at the end of year 6. The taxpayer will have calculated the rent payable under the lease for the first 3 years at £50,000 per annum. For the next 2 years, and the remainder of the term of the lease, they will have used an estimate to the best of their judgment (in this case A Ltd considers on the facts, that the rent will increase to £57,000 in the first rent review). They therefore calculate the NPV using 3 years with rent of £50,000 and 2 years with rent of £57,000 (with £57,000 used to calculate the NPV for years after year 5). In this case the NPV is £328,197.

Example 2

B Ltd is opening a new shop and has been granted a lease for a term of 7 years. The lease is a turnover lease, with the rents expressed as a 4% percent of the sales net of VAT or a minimum of £40,000 per annum. The actual rent based on the turnover must be paid to the landlord 3 months after the year end (31 December). B Ltd has projected its net turnover for the first 5 years to be £750,000, £900,000, £1,200,000, £1,300,000 and £1,300,000. The return on the grant of the lease should use the following rent figures £40,000 (as it is higher than £750,000 x 4%), £40,000 (as it is higher than £900,000 x 4%), £48,000 (£1,200,000 x 4%), £52,000 (£1,200,000 x 4%), and £52,000. The highest amount in any 12-month consecutive period is also £52,000 which is used to calculate the NPV for years 6 and 7. In this case the NPV is £291,552.

Variable or uncertain rent: Rent reviews

Where the terms of a lease provide for a rent review within the first 5 years, or the rent is otherwise uncertain or unascertained, the rent is variable and uncertain at the date of grant. For the purposes of calculating NPV for the first 5 years, a reasonable estimate should therefore be made of the amount payable. This need not necessarily be a professional valuation, but evidence of the basis of the estimate must be kept in case of a WRA inquiry.

First Rent Review in final quarter of 5th year

(paragraph 11)

A rent review is treated as falling after the end of the fifth year of the lease term, so is effectively disregarded for LTT purposes, if:

  • it is the first or only review
  • review is to an amount which is uncertain at the date of grant of the lease
  • the review date is 5 years after a specified date (for example, the ‘start date’ of a lease predating grant), and
  • the specified date falls within 3 months before the beginning of the lease term.

The outcome of the first rent review during the term of a lease will therefore be ignored if that rent review is after the date 4 years and 9 months from the start of the lease term.

The legislation refers to a ‘specified date’ so this provision only applies where the 5-year review is provided for in the terms of the lease.

Adjustment where rent determined on reconsideration date

(paragraph 12)

Where the rents payable are contingent, uncertain or unascertained, and a reconsideration date is reached, the taxpayer must determine the amount of rent payable for the first 5 years of the lease. The reconsideration date is the date falling at the end of the 5th year of the term of the lease, or, any earlier date on which the amount of rent payable in respect of the first 5 years of the term of the lease ceases to be uncertain. This will mean that a taxpayer should need to make one additional return in relation to the lease rents.

In relation to contingent rent the amount ceases to be uncertain when the contingency occurs, or it is clear that it will not occur. For uncertain or unascertained rent, it is when that amount becomes ascertained.

Underpayment of tax where rent determined on reconsideration date

(paragraph 13)

If as a result of the reconsideration date establishing the rents payable for the first 5 years of the term of the lease results in either a land transaction becoming notifiable, or additional LTT is payable then a return or further return must be made before the end of 30 days beginning with the reconsideration date.

Where the reconsideration date arises as a result of the date falling at the end of the fifth year of the lease the taxpayer is required to make a return within 30 days of that date. However, at such a point, for example for a turnover lease, it is possible that the rents remain uncertain. In such a case the taxpayer must, if the land transaction becomes notifiable or additional tax is payable, still send in a return within 30 days of the end of the 5th year of the lease. That return will need to be made to the best of the taxpayer‘s judgment, for example where the first 4 years rents are now known but the 5th is unknown, the return should be made including the actual rent for those 4 years and an updated estimate for the 5th year based.

Following submission of that return, the taxpayer has 12 months from the filing date of the return within which to amend the return to provide an accurate figure for rents payable. The amendment to the return must be made in accordance with the relevant rules. This rule is to ensure that there is a fixed date by which time the tax payable on the lease is final.

Example

The facts are the same as for B Ltd in the calculation of the NPV where the rents are uncertain. B Ltd establishes its turnover by 31 March each year so that it can make a correcting payment to its landlord. The actual turnover for the first 4 years, which are known at the date falling at the end of the 5th year of the term of the lease are £825,000, £950,000, £1,250,000, and £1,400,000. The actual rents payable are rent figures £40,000 (as it is higher than £825,000 x 4%), £40,000 (as it is higher than £950,000 x 4%), an increase to £50,000 (£1,250,000 x 4%), an increase to £56,000 (£1,400,000 x 4%). The year 5 turnover is not yet established, therefore B Ltd must make an estimate to the best of its judgment. B Ltd based on the figures so far available for the fifth year believes that the turnover will be marginally higher at £1,425,000 (rent of £57,000). The NPV is therefore £309,049 with the rent for the years after year 5 based on the last years rent (which is also the highest 12 month consecutive period in the first 5 years as well). A return is sent in by the filing date which is 30 days after the reconsideration date (in this case the reconsideration date is 31 December 2024, so the filing date is 30 days after that date – 30 January 2025).

By 31 March 2015 B Ltd establishes that the rents in the 5th are lower than expected at £1,390,000 (rent of £55,600). B Ltd must make an amendment to the further return to reflect the actual rent payable in year 5. As a result the rent for the years after year 5 also need to be changed as the highest rent in the first 5 years is now that paid in year 4 rather than the previous estimate used for year 5. The NPV is therefore £308,072. A repayment will be made by WRA of the overpayment of tax.

In the event that the rents had increased over the year 5 estimate then the return would need to be amended to reflect this fact and additional tax paid by B Ltd.

Overpayment of tax where rent determined on reconsideration date

(paragraph 14)

If as a result of the reconsideration date there is less LTT payable the taxpayer may make an amendment to the return where that is possible or if they cannot make an amendment to the return may make a claim to WRA for repayment of the LTT overpaid.

An amendment to the return must, generally, be made within 12 months of the filing date for the return. The amendment must therefore be made within 13 months of date the lease was granted.

The rules relating to the date by which a claim must be made are extended for claims made relating to an overpayment where the rent is determined on a reconsideration date. The repayment claim can be made within the period of 4 years after the filing date for the original return or, if later, a period of 12 months beginning with the reconsideration date. Where the reconsideration date is the date falling at the end of the 5th year of the term of the lease the later rule will apply, giving the taxpayer 12 months from the reconsideration date to make their claim for repayment. Claims made after that period will not be repaid.

Example

Y Ltd was granted a 10 year lease on 1 April 2025. It filed a return based on its best judgment of the rent payable on the filing date of 1 May 2025. The rents are uncertain and will only be ascertainable at the end of the first 5 years of the lease. The reconsideration date is therefore 31 March 2030. Y Ltd establishes that it overestimated the rents payable over the first 5 years of the term of the lease and is due a repayment. It cannot make an amendment to the return made on 1 May 2025 as the 12 month period for doing so has passed. It must therefore make a claim to WRA for repayment of the LTT. The claim must be made by the later of 1 May 2029 (4 years from the filing date for the return to which the claim relates) or 31 March 2030 (12 months after the reconsideration date). If Y Ltd makes its claim by 31 March 2031 WRA will make repayment (if it accepts there has been an overpayment). If the claim is made after that date the repayment will not be made.

Premium – consideration other than rent

The term ‘premium’ is not used in the LTT legislation, despite being a common term for consideration given for a lease that is not rent. Instead the expression ‘consideration other than rent’ (e.g. a premium) is used.

Consideration given by a tenant to a landlord for the grant of a lease will be chargeable to LTT as a premium, unless it is by way of rent (or otherwise exempt from charge).

Chargeable consideration for the grant of a lease which is in respect of a period before the lease is granted is not rent for LTT purposes, even if it is described as such, and may be taxed as consideration other than rent.

Premium payments for a lease are charged to LTT in the same way as other chargeable consideration; for example, the payment of an amount to acquire a freehold interest.

Where both a premium and rent are payable for the grant of a lease, the tax due on the 2 elements of consideration will be calculated separately and added together to determine the total LTT payable. It should be noted that, where a taxpayer is granted a lease that includes both rent and a premium, there are special rules which may apply. If the special rules apply, the taxpayer will not be entitled to the zero rate threshold for the amount paid as the premium.

Reverse premiums – not chargeable consideration

(paragraph 15 Schedule 6)

A reverse premium is defined as:

  • A premium paid by a landlord to a tenant in relation to the grant of a lease, or
  • A premium paid by the assignor to the assignee in relation to the assignment of a lease, or
  • A premium paid by the tenant to the landlord in relation to the surrender of a lease.

Such payments are not chargeable consideration for the purposes of LTT.

Tenants’ obligations  - not chargeable consideration

(paragraph 16)

When a new lease is granted, the following are not counted as chargeable consideration:

  • any undertaking by the tenant to repair, maintain or insure the premises
  • any undertaking by the tenant to pay any amount for services, repairs, maintenance or insurance or the landlord’s costs of management
  • any other obligation undertaken by the tenant that is not such as to affect the rent that a tenant would pay in the open market
  • any guarantee of the payment of rent or the performance of any other obligation of the tenant under the lease
  • any penal rent, or increased rent in the nature of a penal rent, payable in respect of the breach of any obligation of the tenant under the lease;
  • payment by a tenant of a landlord’s costs under the statutory provisions governing the enfranchisement or extension of leases of flats and long leases of houses, or an obligation to pay such costs
  • payment by a tenant of a landlord’s other reasonable costs on or incidental to the grant of a lease, or an obligation to pay such costs
  • any obligation under the lease to transfer to the landlord payment entitlements granted to the tenant under the Single Payment Scheme (agricultural leases).

Payment by a tenant in discharge of any of the obligations noted above is not chargeable consideration.

The above payments are not chargeable consideration even if they are reserved as rent under the terms of the lease. However, where a single sum is provided for in the lease, to cover (for example) both rent and service charge, the amount excluded from chargeable consideration must be calculated based on a just and reasonable apportionment.

Equally, on the surrender of a lease, payment to release a tenant from any of the above obligations, is also not chargeable consideration.

Surrender of existing lease in return for new lease

(paragraph 17)

Where a lease is granted in consideration of the surrender of an existing lease between the same tenant and landlord, the respective grant and surrender are not chargeable consideration for each other and the exchange rules do not apply.


Assignment of lease – assumption of obligations by new owner

(paragraph 18)

Where a lease is assigned; the assumption of obligations under that lease by the new tenant to pay rent or to perform or observe any undertakings set out in the lease, do not count as chargeable consideration.

Deposit and loan in connection with grant or assignment of lease

(paragraph 19)

Where a tenant (or a person connected to them) makes a loan, or pays a deposit (whether to the landlord or to a third party), the repayment of which is contingent on anything to be done or not to be done by the tenant:

  • the amount of the loan or deposit is to be treated as consideration other than rent (premium) paid by the tenant for the grant of the lease;
  • except where the amount of the deposit does not exceed twice the relevant maximum rent (being the highest rent payable in respect of any continuous 12-month period during the first 5 years of the term of the lease); under these circumstances the loan or deposit it is ignored for the purposes of LTT.

The same provisions apply to loans made, or deposits paid, by an assignee in connection with the assignment of a lease. In this case, the relevant maximum rent is the highest rent payable in respect of any continuous 12-month period during the first 5 years of the term that remains of the lease, at the assignment date.

The relevant maximum rent is, in both a grant and an assignment, established without reference to situations where there is an overlap between 2 leases or return periods and credit is given to reduce the overlap. The reduced amount of rent as a result of the overlap credit is ignored and the rents under the term of the lease are used to establish the relevant maximum rent.

LTTA/4100 Agreements for lease, assignments and variations

Agreement for lease

(paragraph 20)

A lease is often preceded by an agreement for lease. Although this may operate in law as an equitable lease, for LTT it is treated as a contract which is not chargeable to LTT if:

  • entering into an agreement for lease does not in itself constitute a land transaction under the LTT rules, or
  • if the agreement is not ‘substantially performed’ before the lease itself is concluded, the agreement is treated as part of the same transaction as the lease and the effective date will be that of the lease itself.

However, if a written agreement is ‘substantially performed’ before the lease is concluded, it may itself be treated as the grant of a ‘notional lease‘, with the effective date being that of substantial performance.

The effective date of the transaction for a notional lease is the date of substantial performance of the agreement. An agreement for lease is completed by the grant of a lease in conformity with the agreement (this is the ‘actual lease’).

When an actual lease is granted, the notional lease is treated as if it were a lease that had been granted on the date it had been substantially performed; for a term beginning on that date (lease start date), and ending on the end date of the actual lease, and in consideration for the rent paid over that (longer) term.

When these circumstances arise the grant of the actual lease is disregarded, except in relation to the requirement for a further return in relation to the notional lease to be submitted, as a result of the actual lease being a later linked transaction.

In all cases the grant of the notional lease and the grant of the actual lease are treated as linked transactions. Where there is a change in the tenant between the effective dates for the notional lease and the actual lease the tenant under the actual lease is liable for any LTT or additional LTT, due in respect of the notional lease as a result of the linked transaction, and the tenant under the actual lease is to be treated as the buyer under the notional lease for these purposes.

Where an agreement for lease is entered into and substantially performed, but within 12 months of the date of the substantial performance of the agreement it is rescinded or annulled, and the relevant return is amended by the taxpayer, the WRA will repay the tax.

Example

A Ltd enters into an agreement for lease with B Ltd. The land is non-residential and the agreement for lease is for a term of 5 years from the date that the lease is actually granted. The agreement is made on 1 March 2020 and A Ltd pays its first quarter’s rent on that date. The agreement for lease is therefore substantially performed on that date as well. The taxpayer must submit a return by 31 March 2020 in relation to that notional lease assuming it is a notifiable transaction. The notional lease will be treated as being for a period of 5 years (the period of the lease under the agreement to lease). When the actual lease is granted, a further return will be required for the return made in relation to the notional lease. In this case, B Ltd grants the lease on 1 October 2021. The further return will need to be made by 31 October 2021 self assessing the tax due on the longer notional lease, being 6.5 years (made up of the period the agreement for lease was operating 1 March 2020 to 30 September 2021 and the period of the lease 1 October 2021 to 30 September 2026.

Assignment of agreement for lease

(Paragraph 21)

If an agreement for lease, or an interest in an agreement for lease, is assigned from one person to another the pre-completion rules in schedule 2 do not apply.

Instead, if the agreement has not been substantially performed, the rules relating to contract and transfer apply as though the agreement was with the assignee and not the original person with whom the original agreement for lease was made, and that the consideration given by the assignee for the agreement included any consideration given by them for the assignment.

If the agreement has been substantially performed, then the assignment is a separate land transaction and the date of the assignment is the effective date of the transaction.

Cases where assignment of lease treated as a grant of a lease

(paragraph 22)

In most cases the assignment of a lease will result in LTT being payable on any consideration given other than rent, for example a premium, but not on the rent payable under the lease. This is because those rents have already been taxed when the lease was first granted. Any tax that becomes due in the future, for example where the lease is extended, must be taxed.

If, when the lease was granted, the buyer claimed a relief under:

  • sale and leaseback relief
  • alternative finance investment bond relief
  • group relief
  • reconstruction and acquisitions relief
  • charities relief, or 
  • relief applying to certain acquisitions involving public bodies

the first assignment of the lease that is not subject to a claim to relief listed above (or is not acquired as bare trustee of the assignor) is treated as though it were the grant of a lease.

The term of the lease deemed to have been granted is for a term equal to the unexpired term of the lease when assigned to a person not claiming one of the reliefs, and is deemed to be granted on the same terms as first granted.

The deemed grant of lease rules do not apply if the withdrawal of relief rules, as a result of a relevant disqualifying event, are triggered and applied to the original grant of the lease transaction, or such subsequent transaction for which a claim to relief was made.

Assignment of lease

(paragraph 23)

Where a lease is assigned any LTT obligations that would have fallen on the seller on or before the effective date of the transaction become the obligations of the buyer after that date.

The obligations that may become the buyers are:

  • the duty to make a return where a contingency is ascertained
  • the duty to make a return or further return in consequence of later linked transactions
  • the duty to make a return or further return where a fixed term or indefinite term lease continues
  • the duty to make a return or further return where an underpayment of tax arises when rent is determined on a reconsideration date.

Additionally, the buyer will be entitled to make a claim where an overpayment of tax arises as a result of rent being determined on a reconsideration date.  

Reduction of rent or term or other variation of the lease

(paragraph 24)

Where a lease is varied so that the rent payable is reduced, that variation to the lease is treated as an acquisition of a chargeable interest by the tenant and any consideration given in money or money’s worth is chargeable to LTT.

In relation to any other variation, any consideration in money or money’s worth (other than an increase in rent) given by the tenant for the variation is an acquisition of a chargeable interest by the tenant and chargeable to LTT.

A variation to a lease that reduces the term of the lease is treated as the acquisition of a chargeable interest by the landlord.  In the event that the landlord pays the tenant money or money’s worth for the agreement to the reduction in the term that amount will be liable to LTT and a return must be made to the WRA if it is a notifiable transaction.

Increase of rent treated as grant of new lease: variation in the first 5 years

(paragraph 25)

Where a lease is varied so that the amount of rent is increased from a date before the end of the fifth year of the term of the lease, the variation is treated as the grant of a lease made in consideration of the additional rent payable. However, this rule does not apply where the variation was as a result of a provision contained in the lease before the variation was made, or of variations arising in relation to certain agricultural leases.

LTTA/4110 Calculation of relevant rent

(paragraph 36)

The relevant rent is the highest annual rent over the entire term of the lease. Where, at the effective date of the transaction, the rent is not ascertainable for the entire term of the lease, the relevant rent is the highest ascertainable annual rent payable. Where the lease specifies rent for periods other than annual periods, the relevant rent will be the highest ascertainable rent for any such period, averaged into an annual figure. Where rent is uncertain, but can be determined using a reasonable estimate, then it should be ascertained using such an estimate. The exception to this rule is that, where the rent is only expected to increase in line with an index designed to express inflation, the uncertainty can be ignored and the relevant rent based on known certain rent. Where the rent is uncertain because additional rent would be due if a specified contingency were to take place, then the rent is to be ascertained on the basis that the contingency will occur.

Where there are a number of leases in a linked transaction, the relevant rent should be calculated separately for each of them then added together. 

Example 1

Company A enters into a 5-year lease agreement. The rent is set at a constant £7,000 per annum. The relevant rent is £7,000.

Example 2

Company B enters into a 10-year lease agreement. The rent is set at a constant £8,900 per annum. There is a rent review at the end of the fifth year. The relevant rent is the highest ascertainable (at the effective date of the transaction) amount of rent payable; namely £8,900.

Example 3

Company C enters into a 10-year lease agreement. The rent is set at a constant £7,000 per annum for the first 5 years, increasing to £9,500 per annum thereafter. The relevant rent is the highest ascertainable (at the effective date of the transaction) annual rent; namely £9,500.

Example 4

Company D enters into a 15-year lease agreement. On the effective date of the transaction the rent value is only ascertainable in respect of the first year. The rent for the first month is set at £400, increasing by £50 per month until the end of the first year of the term of the lease (£450 for the second month, £500 for the third until the 12th month, which is set at £950). The highest ascertainable amount of rent payable for any period during the term of the lease, is £950 per month (for the 12th month). The relevant rent is an annualised figure based on the highest ascertainable (at the effective date of the transaction) amount of rent payable, and will therefore be £950 X 12 = £11,400.

Example 5

Company E enters into a 5-year lease agreement. The rent is set at £12,000 for the first 18 months and £15,000 for the second 18-month period. Rent beyond the first 3-year period is not ascertainable at the effective date of the transaction. The relevant rent is an annualised figure based on the highest ascertainable (at the effective date of the transaction) amount of rent payable, and will therefore be £15,000 /18 X 12 = £10,000.

Example 6

Company F enters into a 12-year lease agreement. The rent is set at a constant £8,000 per annum. However, the lease provides that the rent will increase to £9,500 if the Bank of England increases the rate of interest to above 3% at any time during the term of the lease. The relevant rent is calculated on the basis that the contingency will take place. The relevant rent is therefore £9,500.