SDLT on turnover rent leases

In the sixth article of our series, Tax in 2024 for the Future Energy Sector, the TLT Tax team considers Stamp Duty Land Tax (SDLT) in the context of turnover rent leases with an important reminder that a tenant’s SDLT obligations don’t end at completion.

What is a ‘turnover rent lease’ in the context of solar energy projects?

A lease which is granted on terms where the amount of rent payable by the tenant depends (in whole or part) on the performance of the business, such as its profits or turnover, is frequently referred to as a turnover rent lease. In the context of solar energy projects, the “turnover rent” will often be linked to the power output of the tenant’s project (i.e the electricity generated by the solar farm). In such cases, the actual rent to be paid by the tenant year on year is unlikely to be known at grant, because the site’s output has yet to be established.

How are turnover rent leases taxed for SDLT purposes?

SDLT is generally payable on new leases by reference to the net present value of the rent that is payable over the lease term and any non rent consideration (lease premium).

Where the amount of rent is fixed in value, the value on which the SDLT calculation should be based is generally clear. However, where (as with turnover rent leases) the amount of rent depends on a future event that is uncertain or unascertained at the effective date of grant (usually completion), the tenant is required to make a reasonable estimate of that rent for each of the first 5 years of the lease for the purpose of determining its SDLT liability. The same rule applies where the amount of rent is certain but payment of that amount depends on the occurrence of an uncertain future event (contingent consideration).

What are the tenant’s SDLT obligations at the grant of a turnover rent lease?

A tenant whose lease contains turnover rent or any other uncertain, unascertained or contingent rent provision, will therefore have to make a reasonable estimate of the rents that it expects to pay for each of years 1-5 of the lease term in order to quantify its total SDLT liability. Where the lease term exceeds 5 years, the highest rent payable over any consecutive 12 month period within years 1-5, taking into account those reasonable estimates, will be the rent applied to years 6+ for calculating SDLT.

Where there is other consideration, for instance a fixed basic rent, or a lease premium, these elements should be brought into the SDLT calculation in the usual way, based on the stated fixed amounts.

It is the overall SDLT liability resulting from these calculations that determines the total sum to be paid by the tenant to HMRC within 14 days of grant of the lease (or any earlier effective date).

What are the tenant’s ongoing SDLT obligations?

The tenant must review its initial SDLT calculation on the earliest of the following three events:

1. termination of the lease;

2. the fifth anniversary of the lease term; and

3. the date that all of the actual rents for each of the first five years of the lease term are known.

At the earliest of these events, the tenant should recalculate its SDLT liability, replacing any rent estimates for years 1-5 with the actual rents paid and using updated reasonable estimates for any of years 1-5, for which the actual rents are still not known, applying the rates and thresholds in force at the original effective date.

If any of the actual rents for years 1-5 are still unknown at the fifth anniversary, which will often be the case for turnover rent leases, the tenant must carry out a further SDLT recalculation as soon as they have been established.

The tenant should adjust its SDLT payment to HMRC accordingly either paying any top-up of SDLT due plus late payment interest (accruing from and including the 31st day following the original effective date up to the date of payment) and filing a further (letter) return to HMRC notifying them of the additional liability. These payment and filing obligations must be fulfilled within 30 days of the relevant recalculation date.

What happens if the actual rent is lower than estimated?

Where the outcome of the tenant’s recalculation is that SDLT has been overpaid, the tenant may claim, by letter, a refund of overpaid SDLT plus (lower) repayment interest. There is no time limit to make such a claim.

In some cases, the lease may not have been notifiable at grant, based on the tenant’s reasonable estimates. Where the SDLT recalculation indicates that the lease has become notifiable, the tenant must notify HMRC by online SDLT return within 14 days, making payment of any SDLT due by the same deadline and with late payment interest calculated from and including the 31st day after the original effective date.

Do these rules only apply to turnover rent leases?

No. Other examples of uncertain/unascertained rent include, among others, market rent leases and rent that is to be adjusted in the first five years in line with CPI or by reference to the RPI but not “in line with” it. Equally, rent that is subject to a rent review within years 1-5 should be treated as uncertain rent for the purpose of calculating SDLT (subject to specific exceptions).

Are there any other considerations with turnover rent leases?

When carrying out a calculation for SDLT a tenant should always consider whether their acquisition is part of a scheme, arrangement or series of (land) transactions that are linked for SDLT purposes. Where they are linked, the acquisitions will share one nil rate band between them, for the purpose of calculating SDLT. It is generally accepted that in order to be linked, transactions must be part of the same ‘deal’.

Where a turnover rent lease is one of a number of linked acquisitions, the tenant should consider whether its original calculation and any subsequent SDLT re-calculations triggers an obligation to file a further letter return in respect of any other linked acquisitions or their notification for the first time.

TLT comment

After completion of a turnover rent lease, the tenant’s focus will naturally be on the development and success of their solar energy project and it is easy for the tenant to overlook their ongoing SDLT obligations. This can result in the tenant incurring an unexpected further SDLT liability, late payment interest and late filing penalty. Businesses entering into turnover rent leases should plan for the possibility that additional SDLT liabilities may arise in relation to those leases and put in place processes to ensure that key SDLT deadlines are not missed and SDLT compliance obligations are met.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at September 2024. Specific advice should be sought for specific cases. For more information see our terms & conditions.