In this year’s budget speech, Gordon Brown announced a new way of taxing leases, supposedly to tackle their use for avoidance and to promote a “level playing field” with the taxation of property transfers. The chancellor said that he would only trigger the reform if, after consultation with the property industry, no effective alternative for tackling avoidance could be found.
The charge forms part of the modernised regime for stamp duty in the Finance Act 2003, known as stamp duty land tax (SDLT), which is due to be introduced on 1st December.
SDLT aggregates the rents payable throughout the term of the lease, then discounts them at a rate of 3.5% per year to determine the net present value (NPV) of the lease. The charge is 1% of the NPV. Under stamp duty, the charge was 2% of the average yearly rent for most commercial leases (those for between 7 and 35 years).
Take a lease of £100,000 a year for 15 years. Under stamp duty the charge was 2% of the annual rent, namely £2,000. Under SDLT the NPV of the rents is £1,151,741, so the charge would be £11,151.
The reform, if enacted, is likely to discourage long leases. If, in our example, the tenant only had taken a 10-year term, the stamp duty would have been the same. But the SDLT would be £3,200 less than the £11,151. Tenants with bargaining power are likely to seek shorter renewable leases rather than longer leases, even with break options.
The measures have been, and continue to be, controversial. Many commentators have rejected the idea that leases are used for avoidance. The chancellor’s claim that 60% of leases will fall outside the new charge has been disputed.
The consultation process is still in progress. But the government has made it clear that there is “no possibility” that the status quo will be retained. Any industry alternative must address five criteria published by the Inland Revenue including promoting fairness and removing distortions.
It is also notable that the extra revenue from the tax has been included in the budget financial statements and the NPV proposal has been legislated, subject to powers for the treasury to make changes. This suggests that the NPV proposal is the most likely option, and the most that the consultation process will deliver is tinkering at its edges.
Ben Taylor, associate Allen & Overy
Related items:
In this year’s budget speech, Gordon Brown announced a new way of taxing leases, supposedly to tackle their use for avoidance and to promote a “level playing field” with the taxation of property transfers. The chancellor said that he would only trigger the reform if, after consultation with the property industry, no effective alternative for tackling avoidance could be found.
The charge forms part of the modernised regime for stamp duty in the Finance Act 2003, known as stamp duty land tax (SDLT), which is due to be introduced on 1st December.
SDLT aggregates the rents payable throughout the term of the lease, then discounts them at a rate of 3.5% per year to determine the net present value (NPV) of the lease. The charge is 1% of the NPV. Under stamp duty, the charge was 2% of the average yearly rent for most commercial leases (those for between 7 and 35 years).
Take a lease of £100,000 a year for 15 years. Under stamp duty the charge was 2% of the annual rent, namely £2,000. Under SDLT the NPV of the rents is £1,151,741, so the charge would be £11,151.
The reform, if enacted, is likely to discourage long leases. If, in our example, the tenant only had taken a 10-year term, the stamp duty would have been the same. But the SDLT would be £3,200 less than the £11,151. Tenants with bargaining power are likely to seek shorter renewable leases rather than longer leases, even with break options.
The measures have been, and continue to be, controversial. Many commentators have rejected the idea that leases are used for avoidance. The chancellor’s claim that 60% of leases will fall outside the new charge has been disputed.
The consultation process is still in progress. But the government has made it clear that there is “no possibility” that the status quo will be retained. Any industry alternative must address five criteria published by the Inland Revenue including promoting fairness and removing distortions.
It is also notable that the extra revenue from the tax has been included in the budget financial statements and the NPV proposal has been legislated, subject to powers for the treasury to make changes. This suggests that the NPV proposal is the most likely option, and the most that the consultation process will deliver is tinkering at its edges.
Ben Taylor, associate Allen & Overy
Related items:
A new stamp edition – Melville Rodrigues and Jonathan Evans consider the Finance Act 2003 and the new stamp duty land tax that it introduces.
New duty raises concerns – Emma Slessenger comments on the new tax in relation to electronic conveyancing.
Finance Bill seeks regime change – Melville Rodrigues and Jonathan Evans review the Finance Bill 2003.