Leasehold Properties (Hansard, 6 November 1996)

§ Mrs. Angela Knight

[holding answer 4 November 1996]: Stamp duty is charged on the grant of a new lease of property by reference to the premium paid for the lease and the average annual rent. Duty on the premium is charged at 1 per cent. but there is no charge on the premium where the premium is £60,000 or less and the average annual rent is £600 or less. Duty is charged on the average annual rent by reference to a sliding scale of rates which depend on the length of the lease. For example, for a lease of over 100 years, the rate of 24 per cent. (£12 per £50 or part of £50 of the average annual rent).

Where an existing lease is sold by the leaseholder to someone else, duty is charged at 1 per cent. on the price paid, in the same way as with the sale of a freehold. No duty is charged on the rent.

I have received representations from the House Builders Federation, the Manufacturing and Construction Industries Alliance, and McCarthy and Stone about the treatment of a grant of a new lease under which the rent is to be adjusted in future in line with changes in the retail prices index.

Where the terms of a lease lay down specific figures for future rent payments, or provide for the rent to be increased by a fixed percentage each year, there is no difficulty in calculating what the average annual rent is for the purpose of the stamp duty charge. The calculation is more difficult where the rent is to depend on the future movement of an index such as the RPI. Decisions of the courts, including the recent case LM Tenancies plc. v Inland Revenue Commissioners, have given some guidance on the calculation of the charge to duty where there is an element which is not ascertainable at the outset.

The Inland Revenue has reviewed its practice on the stamp duty treatment of leases of this type, in the light of the representations which have been made. It accepts that in some cases the calculations which have been made by Stamp Offices produce a figure which is too high.

In the LM tenancies case, the premium paid for a lease was to be calculated by reference to the market price of a Treasury loan stock 25 days after the execution of the lease. The Court decided that duty should be calculated by reference to the value of the stock at the date of execution of the lease.

The Inland Revenue's view, in the light of the court's decision in the LM Tenancies case, is that where the rent under a lease is to be adjusted by reference to changes in the retail prices index, the duty should be calculated by reference to the change in the RPI in the year ending with the date of execution of the lease. The precise method of adjustment may depend on the terms of the lease and on 543W the way they provide for the calculation to be made—for example, whether the rent is to be increased annually or only at longer intervals. Generally, where the adjustment is to be made by comparing the value of the RPI at different dates, the difference between the two values over the latest year will be used to measure the rent increase for stamp duty purposes. For example, if the initial rent is £300 a year and is to be adjusted annually, and the RPI has gone up from 150 to 153 (equivalent to 2 per cent.) over the relevant 12 month period, it would be assumed that the rent would go up by £6—2 per cent. of £300—each year. Thus the rent would be taken as £306 in the second year, £312 in the third year, and so on, in order to calculate the average annual rent under the lease.

The Inland Revenue is issuing instructions to stamp Offices accordingly, to ensure that individual cases are dealt with on a consistent basis. A taxpayer who disagrees with the Stamp Office's calculation of the duty in a particular case will of course have the normal rights of appeal.