By : Sarah McCann
The Inland Revenue estimates that stamp duty on land and property currently raises over £4 billion, of which, about £300 million relates to lease duty. However, despite its obvious monetary importance, the legal framework governing stamp duty has been largely sitting neglected since the consolidating acts of 1891 – which still govern stamp duty to date – The Stamp Duties Management Act 1891 and the Stamp Act 1891. However, this is set to change.
The first obvious signs that reform was in the air came in the 2002 Budget which provoked a consultation exercise in April 2002 and draft legislation in November 2002. Finally, the Finance Bill 2003 (“the Bill”) was published on 16 April this year. This sets down the main changes to stamp duty, although further consultation is necessary in certain areas particularly in relation to larger commercial transactions. Implementation of the reforms is set for 1 December 2003.
The Bill aims to deal with the payment of stamp duty on all transactions and, indeed, abolishes duty on certain transactions (for instance on book debts and other receivables); however this Article will confine itself to examining the changes in relation to stamp duty payable on residential leases and tenancies (often known as “lease duty”). The relevant parts of the Bill for this purpose are primarily Part 4 “Stamp Duty Land Tax”, Part 5 “Stamp Duty” and the accompanying Schedules.
Lease duty is currently payable by reference to the length of the term of the lease and the average annual rent, with four different rates (namely 1, 2, 12 or 24) applying by way of percentage of the amount paid. Not surprisingly, this regime produces distortions with very steep jumps between rates for certain lease lengths. Furthermore, it produces large tax differences between holding property as leasehold or as freehold.
Section 56 of the Bill and Schedule 5 entitled “Stamp Duty Land Tax: Amount of Tax Chargeable:Rent” provide for different rules in relation to the rental element of a new lease. Section 2(2) of the Schedule states that the tax is to be:
“a percentage of the net present value of the rent payable over the term of the lease”.
Subsection (3) goes on to say that such percentage is determined by reference to whether the relevant land consists entirely of residential property (in which case Table A applies) or consists of or includes land that is not residential property (in which case Table B applies)
“and, in either case, by reference to the amount of the relevant rental value”.
The charge is 1% where the net present value of the rent exceeds the relevant zero threshold, which for the purpose of Table A is set at £60,000.
The formula for calculating the net present value of rent payable over the term of the lease is set out in section 3 of the Schedule. Section 4 defines rent payable, and s4(1) expressly states that a sum payable in respect of rent is treated as such even if it is said to include other matters, for instance service charges, unless these are separately identified. Section 5 of the Schedule deals with the effect of a provision for rent review and states that if the lease provides for a rent review on or before the end of the second year, section 51 of the Bill applies in relation to the possibility that the rent may be adjusted on that review. Section 51, in effect, provides that where the whole or part of the rent is contingent, uncertain or unascertained, the rent shall be determined on the basis that the outcome of the contingency will be such that the increased rent is payable.
Section 6 defines the term of a lease as that specified in the lease or the period from effective date of grant to the end of contractual term of the lease, whichever is the shorter. Where a lease is granted pursuant to a contract or agreement for lease, the term runs from the date of substantial performance of that contract or agreement to the end of the term specified in the lease. Where a lease renews a previous lease, the term runs from the date of expiry of the previous lease. Break clauses and renewal clauses are disregarded for the purposes of defining the term of a lease. Section 7 provides that where a lease is for an indefinite term it is to be treated as if it were a lease for a term of 12 years and that this applies in particular to a lease expressed to be perpetual, for life, or determinable on the marriage of the lessee (s7(2)).
Although many short residential leases are already exempt from lease duty on the rental element because the amount payable is very low, the Inland Revenue estimates that the amendments in the zero rate threshold will keep over 90% of all residential leases out of the charge and cites as examples that a 2 year rental lease will be exempt if rent is below £31,500 per annum, a 5 year rental lease will be exempt if rent is below £13,250 per annum and a rental lease of any length will be exempt if rent is below £2,100 per annum. However, it should be borne in mind that the Chancellor has indicated that consultation will continue on the structure set out in the Schedule, and that therefore this may not be the format which is ultimately implemented in December 2003.
Welcome changes will also be introduced by the Bill for Registered Social Landlords. An RSL is defined by section 121 and 128(2) of the Bill as (in England and Wales) a body registered as a social landlord in a register maintained under section 1(1) of the Housing Act 1996. Section 128 of the Bill exempts from stamp duty certain leases granted by RSLs under agreements temporarily to house the homeless. Subsection 1 states that no duty is chargeable if the lease is for an indefinite term or is terminable by notice of a month or less. Subsection 3 provides that the exemption only applies to arrangements entered into between the RSL and a housing authority whereby the landlord provides temporary rented accommodation for individuals nominated by the authority in pursuance of the authority’s statutory housing functions. Temporary rented accommodation is defined as accommodation that has been leased to the landlord for five years or less. The clear purpose of this provision is to aid the Government’s policy on housing the homeless. Importantly, this measure will apply retrospectively to tenancy agreements entered into on or after 1st January 2000, and section 129(3) of the Bill provides for repayment of any stamp duty which was paid if the instrument was stamped prior to Royal Assent.
This does not purport to be an exhaustive review of the amendments which will be implemented by the Bill in relation to residential tenancies, and, of course, as mentioned above certain elements are still the subject of consultation. However, whatever the result of the consultation process it is likely that the Bill will bring into effect significant amendments in this field, of which all property.