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. A 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 day of 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, it is the further £271 of tax that must be paid at the same time as 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.