Land Transaction Tax leases: technical guidance

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It should be noted that LTT is not charged on the net present value (‘NPV’) of the rents payable on the grant of a residential lease; the tax is only payable on the NPV of rents payable on the grant of non-residential and mixed leases. Special rules apply where rent paid on the grant of a mixed lease (a lease that includes both residential and non-residential property). Therefore, except where expressly stated, references to a lease should be read to mean a lease for non-residential property.

There are specific charging rules in LTT in relation to non-residential leases which result, on the grant of a lease, in both the rent payable and any consideration other than rent (commonly a premium) being charged to tax. For an assignment of a lease, generally, only the consideration given to acquire the lease is chargeable. This is because the rents will, in the main, have been taxed already (if they are above the 0% rate band for rents). Specific rules apply to charge an assignment as though it were the grant of a lease.

A lease is:

• an interest or right in or over land for a term of years, or
• any interest or right in or over land that can be ended by a notice of termination or immediately

However, both a licence to occupy land and a tenancy at will are exempt interests and therefore not chargeable to LTT.

(Part 5 Schedule 6)

Tax chargeable in respect of consideration other than rent

(paragraph 33)

Amounts paid as premium or other amounts paid as consideration other than rent for the grant or assignment of a lease are charged to LTT under the rules applicable to such consideration.

Where the grant of a lease or (where appropriate) an assignment of a lease that is to be treated as a grant of a lease, consists of both a consideration other than rent, and rents, the tax calculated under the relevant rules in respect to both are added together to create the amount that the taxpayer must self-assess. It should be noted that in certain cases the 0% rate band for consideration other than rent is removed from the calculation of tax.

Tax chargeable in respect to rent

(paragraph 29)

The amount of tax chargeable in respect of rent for a non-residential or mixed lease is calculated using 3 steps:

• step 1 – calculate the net present value (‘NPV’) of the rent payable over the term of the lease
• step 2 – for the amount of NPV rent falling into each tax band multiply that amount by the tax rate for that band
• step 3 – add together the amounts for each tax band to give the total amount due

The calculation for establishing the amount of NPV can be found at paragraph 31 to Schedule 6 LTTA and for the temporal discount rate at paragraph 32 of that schedule. Further guidance on the NPV calculation is available at LTTA/4080.

It should be noted that in certain cases the 0% rate band for consideration other than rent is removed from the calculation of tax.

The NPV should be calculated on the basis of the term of the lease. The online return, paper return and tax calculator will ask you whether you wish to use the effective date of the transaction or lease start date for the purposes of calculating the NPV.

The term of the lease generally starts on the later of:

• the term commencement date (as specified in the lease), or
• the date of the grant of the lease

The majority of leases will require the effective date of the transactions to calculate the NPV. However, there are certain cases where the legislation states that the term of the lease starts on a date earlier than the date of the grant of the lease. The most common of these scenarios are holdover leases (LTTA/4060) and where a lease continues after a fixed term and a new lease is granted (LTTA/4030). In these types of transactions, you should therefore calculate the NPV using the lease start date rather than the effective date.

Tax chargeable in respect of consideration other than rent: no 0% band for non-residential leases

(paragraph 34) 

Where a lease is granted, or treated as granted, for consideration of both rent and consideration other than rent, then if the amount of the annual rent is £9,000 or greater the 0% band for consideration other than rent does not apply to the premium etc.

The relevant rent threshold changed in February 2021.

For any transaction completed:

• before 4 February 2021 the relevant rent threshold is £9,000
• on or after 4 February 2021 the relevant rent threshold is £13,500

Tax chargeable in respect of consideration other than rent: no 0% band for mixed leases

(paragraph 35)

Where the lease is for both residential and non-residential property, and there is consideration other than rent given, the lease is treated as though it were 2 separate but linked leases, one for residential property and one for non-residential property.

The rent payable in respect of the residential and non-residential property must be apportioned, on a just and reasonable basis, to determine whether the rent attributable to the non-residential property is greater than £13,500. This is the case where the rent is expressed as a single figure, but also where the lease specifies the rent payable for each property type. This ensures that the substance of the transaction is correctly taxed.

However, it should be noted that, for the purposes of calculating the tax due, the entire amount of rent is treated as chargeable consideration because the lease is a mixed lease by virtue of the 2 leases being linked.

Tax chargeable in respect to rent: linked transactions

(paragraph 30)

Where the lease is a non-residential or a mixed lease and is one of a number of linked transactions, the amount of tax chargeable is calculated using the following steps:

• step 1 – calculate the total of the net present values (‘TNPV’) of the rent payable over the terms of the linked leases,
• step 2 – for each band applicable to the acquisition multiply so much of the TNPV that falls into each band by the tax rate for that band,
• step 3 – calculate the total of the amounts reached under step 2. The result is the total tax chargeable in respect of rent for the linked leases,
• step 4 – divide the NPV of the rent payable over the term of the lease in question by the TNPV, 
• step 5 – multiply the total tax chargeable in respect of rent by the fraction reached under step 4,

the result is the amount of tax chargeable in respect of rent for the lease in question. 

Reversionary leases

A reversionary lease is a lease that is granted where the lease start date is a date in the future, i.e. the term of the lease begins after the date on which the lease was granted.

In these circumstances, the effective date of the transaction is the date of the grant of the lease, not the date on which the term of the lease begins.

The Net Present Value (NPV) is calculated on the basis of the rent payable over the term of the lease, where the start date is the later of:

• the term commencement date (as specified in the lease) or
• the date of the grant of the lease

(Part 2 Schedule 6)

Lease for a fixed term

(paragraph 2 Schedule 6)

If the lease is for a fixed term, that has a stated commencement and termination date (or where those dates can be established) then any contingency or right that could result in the lease being terminated before that termination date, or any right to renew the lease, are not taken into account in establishing the tax charge.

A lease for a fixed term can be expressed either as ‘from’ a date or ‘from and including’ a date. Therefore, a lease with a term of 10 years from 25 March 2020 begins on 26 March 2020 and ends on 25 March 2030. Whereas a lease with a term of 10 years from and including 25 March 2020 begins on 25 March 2020 and ends on 24 March 2030.

Leases that continue after a fixed term

(paragraph 3 Schedule 6)

Leases granted for a fixed term ‘and thereafter until determined’ or for a fixed term that may continue beyond the fixed term ‘by operation of law’ are treated for LTT purposes as being for the fixed term stated on grant. Such leases include business tenancies within Part II of the Landlord and Tenant Act 1954 (‘LTA54’) which normally continue beyond the contractual term, until they are terminated or a new tenancy is granted.

A lease will not automatically continue beyond its contractual term if, for example, a business tenancy is contracted out of LTA54 or a business tenant loses the right to renew the lease. In many cases, a tenant remaining in occupation at the end of the contractual term of such a lease may, in strictness, be trespassing, or there may be a tenancy at will or a contractual license. If the tenant remains in occupation under these circumstances then there are no LTT implications and additional tax is not chargeable during the period the taxpayer remains in occupation.

However, there are LTT implications in cases where the lease is treated as continuing beyond its contractual term and rent remains payable, for example:

• A business tenancy within Part II LTA54 normally continues beyond its contractual term until it is terminated or a new tenancy is granted.
• At the end of a business tenancy which is contracted out of Part II LTA54, or where the right to renew is lost, a new implied lease may arise.
• For most residential shorthold tenancies granted for an initial fixed term, the end of the contractual term is followed by a statutory periodic tenancy.

These leases are treated for LTT purposes as being for one year longer than the original term, irrespective of any other rule or operation of law which determines that they should be extended for a longer or shorter period.

Leases are therefore treated as:

1. Running for the length of the original fixed term.
2. If the lease continues after the end of the fixed term it is treated as a lease for a fixed term of one year longer than the original fixed term.
3. If the lease continues after this one year extension, it is treated as being extended by another year and so on until either a new lease is granted or the lease is determined.
4. If the lease actually terminates during any part year during the further periods set out in point 2 and 3 above, then the lease is treated as continuing to that termination date.

Where the increased net present value of the extended lease gives rise to a charge or additional charge to LTT, a return or further return is required. That return or further return must be made within 30 days of the day after the end of that extended period. The tax liability is based on the rates and bands in force at the date that the lease was initially granted (i.e. the effective date for the transaction).

Leases that continue after a fixed term: grant of a new lease

(paragraph 4 Schedule 6)

Where the taxpayer has continued in occupation and the lease is treated as continuing after the fixed term for one, or more than one, year longer than the original fixed term but:

• during any relevant one-year extended period the tenant is granted a new lease of the same, or substantially the same, premises
• the term of that new lease begins in that year, and 
• the provisions relating to tenant holding over: new lease backdated to previous year do not apply

then the lease is not treated as continuing for that one-year extended period (or part of that one year), but rather the term of the new lease is treated as beginning with the day after the original fixed term ended (or any full year extended period as appropriate). This would be the lease start date.

Rent that is payable under the original lease in respect of that one-year (or part thereof) period is to be treated as payable under the new lease.

Leases for an indefinite term

(paragraph 5 Schedule 6)

A lease for an indefinite term, that is any lease where the term of the lease cannot be solely ascertained from the wording of the lease or some other ancillary document (e.g. a periodic tenancy or a lease for life), is treated, when first granted as a lease for a fixed term of one year. If the lease should continue beyond the first year then it is treated as though it were a lease for a fixed term of 2 years. If it continues beyond the second year it is treated as a lease for a fixed term of 3 years and so on.

However, where a lease is not notifiable then the rules above will not apply until such point as the lease does become notifiable (for example if the term has reached 7 years, or there is tax chargeable at a rate of more than 0% etc.). It should be noted that a lease for an indefinite term is treated, when granted, as a lease for less than 7 years.

The filing obligations that a taxpayer is under will depend upon whether the grant of the lease is notifiable, or becomes so due to subsequent yearly extensions.

If the grant of the lease for an indefinite term (which is treated as a lease for a fixed term of one year) is a notifiable transaction, then the taxpayer must send a return to WRA before the end of the period of 30 days beginning with the day after the effective date of the transaction. When there is a lease extension, then the taxpayer is under an obligation to send in that additional return before the end of the period of 30 days beginning with the day after the end of the longer term for which the return is treated as continuing.

If the land transaction only becomes notifiable due to a lease extension for a year at a later date, then the filing obligation arises at that point.

(paragraph 6 Schedule 6)

Successive linked leases

A series of leases will often exist between the same parties; for example, where a short lease is renewed between the same tenant and landlord. A renewal lease will be treated as linked with the original lease if, for example, the rent was fixed under the terms of the original lease or is stated to be the same as that payable under the original lease.

Where leases of the same premises are granted:

• between the same or connected parties
• to take effect one immediately after the other
• whether at the same time or not

these are successive linked leases for LTT purposes, with tax calculated as though the series of linked leases were a single lease. LTT is calculated as though the series of leases were one lease:

• granted at the time the first lease in the series was granted
• for a term equal to the aggregate of terms of all the leases in the series, and
• in consideration of the rent payable under all of the leases in the series.

Successive leases that are not successive linked leases

A series of leases will often exist between the same parties; for example, where a short lease is renewed between the same tenant and landlord. A renewal lease will be treated as linked with the original lease if, for example, the rent was fixed under the terms of the original lease or is stated to be the same as that payable under the original lease.

However, the renewal of a lease will not be treated as linked with the original lease at all for LTT purposes if it can be shown (with appropriate evidence) to have been negotiated at arm’s length, for example if the original or earlier lease:

• expired naturally
• contained no right or compulsion of either party to renew, and/or
• was renewed following entirely new negotiations, as would apply to a new tenant.

Linked leases that are not successive linked leases

Transactions are defined as ‘linked’ for the purposes of LTT if they form:

• a single scheme, arrangement, or
• a series of transactions

between the same parties (or connected persons).

In the case of leases, the tax treatment differs depending on whether they are linked by way of a single scheme or arrangement or as a series of leases (‘successive’ linked leases).

Where, as a matter of fact, leases of 2 or more properties are negotiated as a single bargain between the same or connected parties, the transactions will be treated as linked for LTT purposes. If the special provisions for successive leases do not apply (see above), then tax on linked leases is calculated using special rules.

Linked leases: Calculation of tax liability

Where leases are linked for LTT purposes but the special provisions for successive leases do not apply (see above), then the rules for calculating LTT are modified as follows:-

• Calculate the total tax that would be chargeable on the first lease if the linked transactions were a single transaction:
•  
  • Calculate net present value (NPV) of first lease (NPV1)
  • Aggregate NPV1 with NPV of second lease (NPV2) to give total net present values (TNPV) of rent payable over the terms of both leases. This is the relevant rental value;
  • Calculate the total tax chargeable on the TNPV using the threshold relevant at the date of grant of the first lease
  • Calculate the element of this total amount of tax which relates to the first lease by applying the fraction: NPV1 ÷ TNPV to the total tax chargeable on the TNPV
• Calculate the total tax that would be chargeable on the 2nd lease if the linked transactions were a single transaction:
  • Calculate net present value (NPV) of 2nd lease (NPV2)
  • Aggregate NPV1 with NPV2 to give TNPV of rent payable over the terms of both leases. This is the relevant rental value
  • Calculate the total tax chargeable on the TNPV using the threshold relevant at the date of grant of the second lease
  • Calculate the element of this total amount of tax which relates to the second lease by applying the fraction:
  • NPV2 ÷ TNPV to the total tax chargeable on the TNPV

The 2 separate tax calculations are needed to apply the LTT rates and thresholds appropriate to each lease. The leases are linked, and the NPVs of rents aggregated, for the purposes of applying the relevant thresholds and rates fairly and proportionately. Where there is a third etc. linked lease then the rules are applied in the same manner to those leases.

(paragraph 7 Schedule 6)

For the purposes of calculating the net present value (NPV) of rents under the new lease, any rent payable under the new lease for any period falling within the overlap period is reduced by the rent which would have been payable (and has already been taken into account for LTT purposes, or SDLT purposes where transitional rules apply) for the overlap period. This is the case where:

• a lease is surrendered (or treated as surrendered) and, as consideration for the surrender, a new lease is granted for the same or substantially the same premises
• a tenant under a lease to which Part 2 of the Landlord and Tenant Act 1954 applies requests a new tenancy which is then executed
• a head lease is terminated and a sub-tenant is granted a new lease for the same or substantially the same premises as the sub-tenant held previously because of the order of a court or a contractual entitlement arising from the head lease being terminated
• a guarantor for a tenant whose lease has been terminated is, in pursuance of the guarantee, granted a lease for the same or substantially the same premises
• a lease of a building which is varied, for example, where additional floors are added to a building held on the old lease such that the variation gives rise to a surrender and re-grant of the lease

However, the reduction of the rents payable due to the overlap relief does not, potentially, result in no tax being payable for the new lease due to the normal rule that rents are calculated on the highest rent paid in any 12-month period in the first 5 years. This is because otherwise it would be possible for a lease to be granted for 10 years, tax paid on the NPV rents, and then that lease surrendered and re-granted at, say, year 3 for a considerably longer time but with the same rent. As overlap relief would be available for the first 5 years of the new lease (effectively meaning rent payable in the first 5 years was £0 per annum for the new lease) that £0 rent would be treated as the rent for the whole of the term of the new lease. The rules, however, do not permit that to occur, and whilst overlap relief is properly given for the years that have already been assessed to LTT, the later years where ‘new’ rent is payable will still attract LTT on the NPV of the rents.

The overlap period is the period common to the terms of both the new and old lease. It is the period from the date that the new lease is granted to the date that the old lease would have ended (for LTT purposes) had it not been terminated. This includes extensions to lease terms following the end of a fixed term, or an indefinite lease.

The rent which would have been payable under the old lease is that which was taken into account in calculating NPV for LTT self-assessment on the acquisition of the old lease.

Overlap relief cannot reduce the rent payable under the new lease to a negative amount. In other words, the amount of rent to be used in the NPV calculation for any year cannot be less than nil.

It should be noted that:

• overlap relief is available where the old lease was subject to SDLT under the transitional rules or LTT. Where the old lease was subject to stamp duty, all rent payable under the new lease should be included in the NPV calculation for the new lease, irrespective of any overlap period, because no rent has been taken into account for SDLT or LTT purposes
• no overlap relief is available where a lease was the subject of an SDLT or LTT exemption, or relief has been claimed, and is subsequently surrendered and replaced by a new lease which does not meet the conditions for relief. No rent was taken into account in determining the amount of tax due on the first lease so there can be no entitlement to this relief
• where the rent is variable then overlap relief is disregarded and the ‘highest rent’ is the rent determined before any reduction for overlap relief

Meaning of ‘substantially the same’

What constitutes “substantially the same property” is ultimately a question of fact. The overlap relief is intended to ensure that the taxpayer does not pay tax on the same land for the same period twice. For example, overlap relief would apply where a lease for half of a building was surrendered and replaced by a lease for all of the same building.

Overlap Relief: Rent taken into account

What is included in the term ‘rent taken into account’ on completion of a lease following substantial performance?

LTT is due on substantial performance of an agreement for lease, based on the rents for the first 5 years. If the rent increases in year 6 it is ignored in the calculation of the NPV.

Where a lease is subsequently granted after substantial performance, if there have been no changes to the terms of the lease (i.e. by variation etc.) the increased rent in year 6 has been ‘taken into account’ on substantial performance in relation to the grant of the lease.

Therefore, if there are no changes between substantial performance and completion there can be no additional LTT to pay.

(paragraph 8) 

Where:

• a tenant under a lease (‘the old lease’) continues in occupation after the date the lease was to terminate (‘the contractual termination date’)
• the tenant is granted a lease of the same or substantially the same premises (‘the new lease’)
• the new lease is granted on a date that is more than one year after the contractual termination date, and
• the term of the new lease begins on a date that is in the period that starts with the contractual termination date and ends with the latest anniversary date that is before the date on which the lease is granted. This period provides the ‘whole years of holdover’

The term of the new lease is treated as beginning on the date it is expressed in the lease (lease start date).

In this case, where the return asks you to enter the effective date of the transaction, this will be the effective date of the new lease.

The rent payable under the new lease, in relation to the period which begins with the date the new lease is expressed as commencing on and ending with the last whole year of holdover, is treated as being reduced by the amount of the taxable rents paid during the holdover period. That cannot, though, create a negative rent figure.

The holdover tenancy is treated as a lease for a fixed term with a termination date that ends on the last date of a whole year holdover period. A holdover tenancy in these circumstances means: the old lease if it continues beyond the contractual termination date, or, any other tenancy of the same (or substantially the same) premises in which the tenant continues in occupation after the contractual termination date.

(Part 3 Schedule 6)

Rent

(paragraph 9 Schedule 6)

Chargeable consideration for a lease or other chargeable transaction which wholly or partly consists of rent is chargeable to LTT.

Whether consideration consists of rent is a question of fact. Consideration may be treated as rent for LTT purposes despite being otherwise described; for example, as a license or fee in an agreement for lease. Conversely, a service charge may be reserved as rent in the lease but not treated as such for LTT purposes.

‘Rent’ does not include consideration payable before a new lease is granted. In most circumstances, such payments prior to the grant of the lease may be taxed as a premium.

A nominal rent is not chargeable consideration for LTT purposes if it:

• is expressed as a peppercorn or similar, or
• has a net present value (NPV) of less than £1

Rent: Inclusive of services etc.

Service charges payable from tenant to landlord are not chargeable consideration for LTT purposes and are excluded from the calculation of tax 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

The fact that a service charge is reserved in the lease as rent does not make it rent for LTT purposes.

Where apportionment of an inclusive figure is necessary, this must be made on a just and reasonable basis and will not necessarily be the same as the apportionment (if any) set out in the lease documentation.

Where a single sum is payable in respect of rent, or 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 LTT purposes

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.

(paragraph 10)

The rent used to establish the net present value (‘NPV’) of the rents is based on the first 5 years of the lease. The NPV can be established using the calculator.

NPV is an amount based on the sum of the rent payable over the term of the lease, with some adjustments, as follows:

• The actual rent payable for any “rent year” is reduced by dividing the rent payable by a factor of (1 + the temporal discount rate) to the power of the rent year (see paragraph 32 of Schedule 6 LTTA the temporal discount rate).

  For example, the formula to calculate the 2nd year NPV of a lease is:

  rent / (1 + temporal discount rate)2 = NPV

• Where the lease is longer than 5 years the annual amount of rent for those additional years is assumed to equal the highest rent payable in any consecutive 12-month period in the initial 5 years.

  For example, where:

  • the rent payable in rent year 7 of a lease is £70,000, and
  • the highest rent payable in any 12-month period in the first 5 years of that lease is £50,000.

  
  The calculation for the 7th year of an NPV calculation is:

  £50,000 / (1 + temporal discount rate)7 = NPV

(paragraph 10)

Where the rent is uncertain, unascertainable or contingent, the taxpayer must use reasonable assumptions or estimates to determine rent for the purposes of the calculation. This will include cases where the variation provided for in the lease, cannot be quantified at the date of grant of the lease; for example, where rents are to be reviewed in line with market rents or business results at a future date. Such rents are uncertain or unascertainable. Similarly, where the rent may vary as a result of a rent review in the first 5 years, the rents will be treated as variable.

Leases may also provide for the level of rent payable to be wholly or partly dependent upon an unknown outcome, such as the granting of planning permission. Such rents are contingent. Where the rent is contingent, NPV for the first 5 years is calculated on the basis that any contingent amount will be payable (or will not cease to be payable).

The rules relating to contingent, uncertain and unascertained consideration apply equally to rents. Also, it is not possible to apply for deferment of payment of LTT in respect of rent if some of the rent is contingent or unascertained as rent is specifically excluded from the ‘deferrable amount’ calculation.

Where the rent is to be increased in line with the retail prices index, or other index, to express inflation; that uncertain increase is ignored for the purposes of establishing the rents payable in the first 5 years of the term of the lease. In such cases the rent amount expressed in the lease, is the rent to be used to calculate the NPV. But, if the rent increases are expressed as, for example, RPI plus 2%, the whole of that rent increase is to be treated as uncertain and adjustments made.

For the purposes of calculating the NPV or the first 5 years, a reasonable estimate should be made of the amounts that will be payable. This need not necessarily be a professional valuation, but evidence of the basis of the estimate must be kept in case of an enquiry.

Variable or uncertain rent: Rent reviews

Where the terms of a lease provide for a rent review within the first 5 years, or the rent is otherwise uncertain or unascertained, the rent is variable and uncertain at the date of grant. For the purposes of calculating NPV for the first 5 years, a reasonable estimate should therefore be made of the amount payable. This need not necessarily be a professional valuation, but evidence of the basis of the estimate must be kept in case of a WRA inquiry.

First Rent Review in final quarter of 5th year

(paragraph 11)

A rent review is treated as falling after the end of the fifth year of the lease term, so is effectively disregarded for LTT purposes, if:

• it is the first or only review
• review is to an amount which is uncertain at the date of grant of the lease
• the review date is 5 years after a specified date (for example, the ‘start date’ of a lease predating grant), and
• the specified date falls within 3 months before the beginning of the lease term.

The outcome of the first rent review during the term of a lease will therefore be ignored if that rent review is after the date 4 years and 9 months from the start of the lease term.

The legislation refers to a ‘specified date’ so this provision only applies where the 5-year review is provided for in the terms of the lease.

Adjustment where rent determined on reconsideration date

(paragraph 12)

Where the rents payable are contingent, uncertain or unascertained, and a reconsideration date is reached, the taxpayer must determine the amount of rent payable for the first 5 years of the lease. The reconsideration date is the date falling at the end of the 5th year of the term of the lease, or, any earlier date on which the amount of rent payable in respect of the first 5 years of the term of the lease ceases to be uncertain. This will mean that a taxpayer should need to make one additional return in relation to the lease rents.

In relation to contingent rent the amount ceases to be uncertain when the contingency occurs, or it is clear that it will not occur. For uncertain or unascertained rent, it is when that amount becomes ascertained.

Underpayment of tax where rent determined on reconsideration date

(paragraph 13)

If as a result of the reconsideration date establishing the rents payable for the first 5 years of the term of the lease results in either a land transaction becoming notifiable, or additional LTT is payable then a return or further return must be made before the end of 30 days beginning with the reconsideration date.

Where the reconsideration date arises as a result of the date falling at the end of the fifth year of the lease the taxpayer is required to make a return within 30 days of that date. However, at such a point, for example for a turnover lease, it is possible that the rents remain uncertain. In such a case the taxpayer must, if the land transaction becomes notifiable or additional tax is payable, still send in a return within 30 days of the end of the 5th year of the lease. That return will need to be made to the best of the taxpayer‘s judgment, for example where the first 4 years rents are now known but the 5th is unknown, the return should be made including the actual rent for those 4 years and an updated estimate for the 5th year based.

Following submission of that return, the taxpayer has 12 months from the filing date of the return within which to amend the return to provide an accurate figure for rents payable. The amendment to the return must be made in accordance with the relevant rules. This rule is to ensure that there is a fixed date by which time the tax payable on the lease is final.

Overpayment of tax where rent determined on reconsideration date

(paragraph 14)

If as a result of the reconsideration date there is less LTT payable the taxpayer may make an amendment to the return where that is possible or if they cannot make an amendment to the return may make a claim to WRA for repayment of the LTT overpaid.

An amendment to the return must, generally, be made within 12 months of the filing date for the return. The amendment must therefore be made within 13 months of date the lease was granted.

The rules relating to the date by which a claim must be made are extended for claims made relating to an overpayment where the rent is determined on a reconsideration date. The repayment claim can be made within the period of 4 years after the filing date for the original return or, if later, a period of 12 months beginning with the reconsideration date. Where the reconsideration date is the date falling at the end of the 5th year of the term of the lease the later rule will apply, giving the taxpayer 12 months from the reconsideration date to make their claim for repayment. Claims made after that period will not be repaid.

Premium – consideration other than rent

The term ‘premium’ is not used in the LTT legislation, despite being a common term for consideration given for a lease that is not rent. Instead the expression ‘consideration other than rent’ (e.g. a premium) is used.

Consideration given by a tenant to a landlord for the grant of a lease will be chargeable to LTT as a premium, unless it is by way of rent (or otherwise exempt from charge).

Chargeable consideration for the grant of a lease which is in respect of a period before the lease is granted is not rent for LTT purposes, even if it is described as such, and may be taxed as consideration other than rent.

Premium payments for a lease are charged to LTT in the same way as other chargeable consideration; for example, the payment of an amount to acquire a freehold interest.

Where both a premium and rent are payable for the grant of a lease, the tax due on the 2 elements of consideration will be calculated separately and added together to determine the total LTT payable. It should be noted that, where a taxpayer is granted a lease that includes both rent and a premium, there are special rules which may apply. If the special rules apply, the taxpayer will not be entitled to the zero rate threshold for the amount paid as the premium.

Reverse premiums – not chargeable consideration

(paragraph 15 Schedule 6)

A reverse premium is defined as:

• A premium paid by a landlord to a tenant in relation to the grant of a lease, or
• A premium paid by the assignor to the assignee in relation to the assignment of a lease, or
• A premium paid by the tenant to the landlord in relation to the surrender of a lease.

Such payments are not chargeable consideration for the purposes of LTT.

Tenants’ obligations - not chargeable consideration

(paragraph 16)

When a new lease is granted, the following are not counted as chargeable consideration:

• any undertaking by the tenant to repair, maintain or insure the premises
• any undertaking by the tenant to pay any amount for services, repairs, maintenance or insurance or the landlord’s costs of management
• any other obligation undertaken by the tenant that is not such as to affect the rent that a tenant would pay in the open market
• any guarantee of the payment of rent or the performance of any other obligation of the tenant under the lease
• any penal rent, or increased rent in the nature of a penal rent, payable in respect of the breach of any obligation of the tenant under the lease;
• payment by a tenant of a landlord’s costs under the statutory provisions governing the enfranchisement or extension of leases of flats and long leases of houses, or an obligation to pay such costs
• payment by a tenant of a landlord’s other reasonable costs on or incidental to the grant of a lease, or an obligation to pay such costs
• any obligation under the lease to transfer to the landlord payment entitlements granted to the tenant under the Single Payment Scheme (agricultural leases).

Payment by a tenant in discharge of any of the obligations noted above is not chargeable consideration.

The above payments are not chargeable consideration even if they are reserved as rent under the terms of the lease. However, where a single sum is provided for in the lease, to cover (for example) both rent and service charge, the amount excluded from chargeable consideration must be calculated based on a just and reasonable apportionment.

Equally, on the surrender of a lease, payment to release a tenant from any of the above obligations, is also not chargeable consideration.

Surrender of existing lease in return for new lease

(paragraph 17)

Where a lease is granted in consideration of the surrender of an existing lease between the same tenant and landlord, the respective grant and surrender are not chargeable consideration for each other and the exchange rules do not apply.

Assignment of lease – assumption of obligations by new owner

(paragraph 18)

Where a lease is assigned; the assumption of obligations under that lease by the new tenant to pay rent or to perform or observe any undertakings set out in the lease, do not count as chargeable consideration.

Deposit and loan in connection with grant or assignment of lease

(paragraph 19)

Where a tenant (or a person connected to them) makes a loan, or pays a deposit (whether to the landlord or to a third party), the repayment of which is contingent on anything to be done or not to be done by the tenant:

• the amount of the loan or deposit is to be treated as consideration other than rent (premium) paid by the tenant for the grant of the lease;
• except where the amount of the deposit does not exceed twice the relevant maximum rent (being the highest rent payable in respect of any continuous 12-month period during the first 5 years of the term of the lease); under these circumstances the loan or deposit it is ignored for the purposes of LTT.

The same provisions apply to loans made, or deposits paid, by an assignee in connection with the assignment of a lease. In this case, the relevant maximum rent is the highest rent payable in respect of any continuous 12-month period during the first 5 years of the term that remains of the lease, at the assignment date.

The relevant maximum rent is, in both a grant and an assignment, established without reference to situations where there is an overlap between 2 leases or return periods and credit is given to reduce the overlap. The reduced amount of rent as a result of the overlap credit is ignored and the rents under the term of the lease are used to establish the relevant maximum rent.

Agreement for lease

(paragraph 20)

A lease is often preceded by an agreement for lease. Although this may operate in law as an equitable lease, for LTT it is treated as a contract which is not chargeable to LTT if:

• entering into an agreement for lease does not in itself constitute a land transaction under the LTT rules, or
• if the agreement is not ‘substantially performed’ before the lease itself is concluded, the agreement is treated as part of the same transaction as the lease and the effective date will be that of the lease itself

However, if a written agreement is ‘substantially performed’ before the lease is concluded, it may itself be treated as the grant of a ‘notional lease‘, with the effective date being that of substantial performance.

The effective date of the transaction for a notional lease is the date of substantial performance of the agreement. An agreement for lease is completed by the grant of a lease in conformity with the agreement (this is the ‘actual lease’).

When an actual lease is granted, the notional lease is treated as if it were a lease that had been granted on the date it had been substantially performed; for a term beginning on that date (lease start date), and ending on the end date of the actual lease, and in consideration for the rent paid over that (longer) term.

When these circumstances arise the grant of the actual lease is disregarded, except in relation to the requirement for a further return in relation to the notional lease to be submitted, as a result of the actual lease being a later linked transaction.

In all cases the grant of the notional lease and the grant of the actual lease are treated as linked transactions. Where there is a change in the tenant between the effective dates for the notional lease and the actual lease the tenant under the actual lease is liable for any LTT or additional LTT, due in respect of the notional lease as a result of the linked transaction, and the tenant under the actual lease is to be treated as the buyer under the notional lease for these purposes.

Where an agreement for lease is entered into and substantially performed, but within 12 months of the date of the substantial performance of the agreement it is rescinded or annulled, and the relevant return is amended by the taxpayer, the WRA will repay the tax.

Assignment of agreement for lease

(Paragraph 21)

If an agreement for lease, or an interest in an agreement for lease, is assigned from one person to another the pre-completion rules in schedule 2 do not apply.

Instead, if the agreement has not been substantially performed, the rules relating to contract and transfer apply as though the agreement was with the assignee and not the original person with whom the original agreement for lease was made, and that the consideration given by the assignee for the agreement included any consideration given by them for the assignment.

If the agreement has been substantially performed, then the assignment is a separate land transaction and the date of the assignment is the effective date of the transaction.

Cases where assignment of lease treated as a grant of a lease

(paragraph 22)

In most cases the assignment of a lease will result in LTT being payable on any consideration given other than rent, for example a premium, but not on the rent payable under the lease. This is because those rents have already been taxed when the lease was first granted. Any tax that becomes due in the future, for example where the lease is extended, must be taxed.

If, when the lease was granted, the buyer claimed a relief under:

• sale and leaseback relief
• alternative finance investment bond relief
• group relief
• reconstruction and acquisitions relief
• charities relief, or 
• relief applying to certain acquisitions involving public bodies
• special tax site relief

the first assignment of the lease that is not subject to a claim to relief listed above (or is not acquired as bare trustee of the assignor) is treated as though it were the grant of a lease.

The term of the lease deemed to have been granted is for a term equal to the unexpired term of the lease when assigned to a person not claiming one of the reliefs, and is deemed to be granted on the same terms as first granted.

The deemed grant of lease rules do not apply if the withdrawal of relief rules, as a result of a relevant disqualifying event, are triggered and applied to the original grant of the lease transaction, or such subsequent transaction for which a claim to relief was made.

Assignment of lease

(paragraph 23)

Where a lease is assigned any LTT obligations that would have fallen on the seller on or before the effective date of the transaction become the obligations of the buyer after that date.

The obligations that may become the buyers are:

• the duty to make a return where a contingency is ascertained
• the duty to make a return or further return in consequence of later linked transactions
• the duty to make a return or further return where a fixed term or indefinite term lease continues
• the duty to make a return or further return where an underpayment of tax arises when rent is determined on a reconsideration date

Additionally, the buyer will be entitled to make a claim where an overpayment of tax arises as a result of rent being determined on a reconsideration date.

Reduction of rent or term or other variation of the lease

(paragraph 24)

Where a lease is varied so that the rent payable is reduced, that variation to the lease is treated as an acquisition of a chargeable interest by the tenant and any consideration given in money or money’s worth is chargeable to LTT.

In relation to any other variation, any consideration in money or money’s worth (other than an increase in rent) given by the tenant for the variation is an acquisition of a chargeable interest by the tenant and chargeable to LTT.

A variation to a lease that reduces the term of the lease is treated as the acquisition of a chargeable interest by the landlord. In the event that the landlord pays the tenant money or money’s worth for the agreement to the reduction in the term that amount will be liable to LTT and a return must be made to the WRA if it is a notifiable transaction.

Increase of rent treated as grant of new lease: variation in the first 5 years

(paragraph 25)

Where a lease is varied so that the amount of rent is increased from a date before the end of the fifth year of the term of the lease, the variation is treated as the grant of a lease made in consideration of the additional rent payable. However, this rule does not apply where the variation was as a result of a provision contained in the lease before the variation was made, or of variations arising in relation to certain agricultural leases.

The relevant rent threshold changed in February 2021.

For any transaction completed:

• before 4 February 2021 the relevant rent threshold is £9,000
• on or after 4 February 2021 the relevant rent threshold is £13,500

The relevant rent is the highest annual rent over the entire term of the lease. Where, at the effective date of the transaction, the rent is not ascertainable for the entire term of the lease, the relevant rent is the highest ascertainable annual rent payable. Where the lease specifies rent for periods other than annual periods, the relevant rent will be the highest ascertainable rent for any such period, averaged into an annual figure. Where rent is uncertain, but can be determined using a reasonable estimate, then it should be ascertained using such an estimate. The exception to this rule is that, where the rent is only expected to increase in line with an index designed to express inflation, the uncertainty can be ignored and the relevant rent based on known certain rent. Where the rent is uncertain because additional rent would be due if a specified contingency were to take place, then the rent is to be ascertained on the basis that the contingency will occur.

Where there are a number of leases in a linked transaction, the relevant rent should be calculated separately for each of them then added together.