Non-Variable or Certain Rent
The tenant usually agrees with the landlord to pay rent throughout the term of the lease. The rent payable under a lease is chargeable consideration for LBTT. For LBTT it is the actual rent payable for each year of the lease.
If there is a chargeable transaction which wholly or partly consists of rent or other consideration but is not apportioned the whole of that consideration is to be treated as rent and is chargeable to LBTT. Where apportionment of an inclusive figure is needed, this must be made on a just and reasonable basis and will not necessarily be the same as the apportionment set out in the lease documentation.
Where the landlord has elected to waive exemption from VAT at the effective date, the rent for LBTT purposes includes the VAT chargeable. An Option to Tax for VAT made after the effective date does not affect the rent for the purposes of the 3-year review.
Service charges payable from the tenant to the landlord are a payment for services the tenant will use throughout the duration of the lease. As such, service charges are not rent and therefore not chargeable consideration for LBTT purposes and would ordinarily be excluded from the calculation 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.
Therefore, if the service charge is separate from the rent, only the rent amount will be chargeable consideration for LBTT purposes.
Where a single sum is payable in respect of rent or of 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 LBTT purposes and the whole amount would be chargeable consideration.
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.
Variable or Uncertain Rent
If the amount of rent to be paid varies in accordance with the provisions of the lease (for example, where there are rent reviews or in turnover leases), then a reasonable estimate of the rent for each year of the lease should be provided in the LBTT return. In the case of an open market rent review, it will normally be acceptable to estimate the rent payable after review as being the same as the previous rent.
However, where the rent is adjusted in line with the Retail Price Index (RPI), Consumer Price Index (CPI) or any similar index whether projected or otherwise in accordance with the provisions in the lease, it is not treated as variable or uncertain rent and is taken as the annual rent.
The adjusted rent should be used when calculating the tax due at a lease review date (either on every third anniversary of the effective date of the lease, on assignation or on termination – see LBTT6014). If the rent is to only vary in accordance with RPI, CPI or any other similar index, it will be acceptable to use the annual rent at the time of the lease review as the estimate of the rent payable for the remaining term.
Variable or uncertain rent is covered in the LBTT(S)A at Schedule 19, Paragraph 13.
If the rent to be paid is contingent on the occurrence of an uncertain future event, then the rent figure used in the LBTT consideration calculation is determined on the assumption that the contingency will result in the rent being paid or not, as the case may be. Contingent consideration is covered at LBTT(S)A 2013, Section 18.
If the amount of rent to be paid depends on an uncertain future event, then a reasonable estimate of the rent should be provided in the LBTT consideration calculation. Uncertain or unascertained consideration is covered at LBTT(S)A 2013, Section 19. This would include cases where there is a possibility that the rent is varied under section 13, 14, 15 or 31 of the Agricultural Holdings (Scotland) Act 1991 or section 9, 10 or 11 of the Agricultural Holdings (Scotland) Act 2003.
As leases are subject to three-yearly reviews that take account of changes to rent payments, repayment claims cannot be made to the extent that the consideration consists of rent, as a result of a contingency ceasing, or it becoming clear that it will not occur, or where consideration is ascertained. This is covered at LBTT(S)A 2013 section 32(3).
In addition, it is not possible to apply for deferral of LBTT payable in relation to a lease where there is contingent or unascertained consideration that consists of rent. This is covered at LBTT(S)A 2013 section 41(5).
The effective date of a ten-year lease of a factory for a rent of £500,000 per annum was 1 April 2016. The terms of the lease provide that the rent will increase annually in line with the rate of the Retail Price Index (RPI).
As the future rates of RPI are not yet known, the net present value (NPV) is initially calculated using the £500,000 payable in each of the ten years. An LBTT return is submitted and tax of £40,083 paid based on the calculated NPV.
The date of the first three-year review will be 1 April 2019, that being the third anniversary of the effective date of the lease. A review return must be submitted no later than 1 May 2019.
The tenant must recalculate the NPV using the actual rent paid in the first three years along with the projected rent for the remaining term:
- The rent paid in 2016 was £500,000
- In 2017, the rate of RPI is 0.3%. Therefore, the actual amount of rent paid was £501,500 (£500,000 x 0.3%)
- In 2018, the rate of RPI is 0.5%. Therefore, the actual amount of rent paid was £504,007 (£501,500 x 0.5%)
In projecting what the rent will be for the remainder of the term, it is acceptable to use the passing rent from 2018 of £504,007. The recalculated NPV gives rise to tax of £40,354.
As £40,083 has already been paid, a further £271 of tax is due and must be paid at the same time the return is made.
Note that the above analysis also applies to rents which vary according to the Consumer Price Index (CPI) or any similar index.
Rent for Overlap Period when a Further Lease is Granted
Rules covering rent for an overlap period in the case of a grant of a further lease are found at LBTT(S)A 2013 Paragraph 24, Schedule 19. The rules apply where one of the following circumstances has taken place:
- party A renounces an existing lease to party B (the old lease) and in consideration of that renunciation party B grants a lease to party A of the same or substantially the same premises (the new lease);
- on termination of a lease (the head lease) a sub-tenant is granted a lease (the new lease) of the same or substantially the same premises as the tenant’s “old lease” in pursuance of a contractual entitlement arising in the event of the head lease being terminated; or
- a person who has guaranteed the obligations of a tenant under a lease that has been terminated (the old lease) is granted a lease of the same or substantially the same premises (the new lease) in pursuance of the guarantee.
The overlap period is the period between the date of the grant of the new lease and what would have been the end of the term of the old lease had it not been terminated.
The rent paid during an “overlap period” is treated as paid under the old lease and not the new lease. Under the transitional rules the rent that would have been payable under the old lease is the amount of rent taken into account in determining the tax chargeable under the SDLT rules in respect of the acquisition of the old lease.
The rent payable under the new lease is treated as reduced by the amount of rent that would have been payable during the overlap period under the old lease (but cannot be a negative amount).
For the grant of a lease (or on assignation), a tenant may pay the landlord (or an assignee) a lump sum amount, such as a premium, (sometimes referred to as a grassum) and this can be in addition to the rent. Premiums are subject to the standard tax rates and bands for non-residential property transactions.
Where the tenant pays the landlord's reasonable fees in connection with the grant of a lease, this does not count as a premium (see LBTT6012).
Consideration other than rent is covered at LBTT(S)A 2013, Schedule 19, Part 3.
A tenant has entered into missives which are conditional on planning. The tenant makes a £9,000 payment to the landlord to secure exclusivity for a period. This payment is for a right of pre-emption in terms of section 12(1)(b), however, it is not notifiable as it is below £40,000.
The conditions are fulfilled and the tenant takes entry under the missives.
The rent is £300,000 per annum. When the tenant takes entry under the missives, the right of pre-emption is linked to the lease and so LBTT will become payable on the premium. If the relevant rent is at least £1,000, the nil rate tax band does not apply in relation to the consideration other than rent and any such consideration that would have fallen within that band is treated as falling within the next tax band.
Loans or deposits in connection with the grant or assignation of a lease is covered at LBTT(S)A 2013, Schedule 19, Paragraph 17.
Grant of a Lease
In a lease transaction, a tenant can make a loan or deposit payment to the landlord.
A loan or deposit made in connection with the grant of a lease is treated as chargeable consideration other than rent paid (disregarding any repayment) for the grant of the lease where:-
- a tenant, or any person connected with or acting on behalf of the tenant, pays a deposit, or makes a loan, to any person, and
- the repayment of all or part of the deposit or loan is contingent on anything done or omitted to be done by the tenant or on the death of the tenant,
However, these rules do not apply where the deposit does not exceed twice the relevant maximum rent. The relevant maximum rent in relation to the grant of a lease is the highest amount of rent payable in respect of any consecutive 12-month period during the term of the lease.
In determining the highest amount of rent, take into account any amounts that are contingent, uncertain or unascertained.
In determining the highest amount, where there is the grant of a further lease and rent within an overlap period, disregard Paragraph 24(2) and instead include the full rent payable under the ‘new lease’ within the overlap period.
Tax is not charged on the loan or deposit if it would only be chargeable because the nil rate tax band was excluded by Paragraph 9 (where the relevant rent attributable to non-residential property is greater than £1,000 per year).
In an assignation transaction, an assignee may make a loan or deposit payment to the landlord, in the same way a tenant may make a similar payment on the grant of a lease. The same rules apply, where the assignee, or any person connected with or acting on behalf of the assignee, pays a deposit, or makes a loan, to any person.
However, these rules do not apply where the deposit does not exceed twice the relevant maximum rent. The relevant maximum rent is the highest amount of rent payable in respect of any consecutive 12-month period during the remaining term of the lease at the date of the assignation.