SDLT and the hold over headache

“Holding over” occurs when tenants remain in occupation of a property after the term of their lease has expired. A landlord and tenant may, for instance, be negotiating a new lease when the old lease expires, or the parties may be happy to rely on the terms of the current lease.

In either case the tenant “holds over” in the property under the terms of the current lease. But holding over has Stamp Duty Land Tax (SDLT) consequences for the tenant and can lead to headaches when they do come to renew their lease.

The SDLT rules about holding over are complicated. This article focuses on the practicalities rather than the technicalities.

Usually, it is the solicitors dealing with the renewal or replacement lease who discover the holding over and flag the SDLT issue. By the time solicitors are appointed, it may have been several years since the tenant started holding over. Additional SDLT may be payable for the hold over period and an SDLT return will be needed in relation to the hold over period, usually one for each year. Each missed return generates a £200 fixed penalty if delivered more than three months late, together with late payment interest (currently 7.5% per annum). These unexpected costs will be an unwelcome surprise.

SDLT on holding over can also be time-consuming to calculate. It involves calculating the original SDLT on the term of the lease and then re-calculating this for a period that is one year longer – and then for each other year (or part year) of the hold over period. HMRC’s online calculator is not suitable for this task, so these calculations must be done manually. The statutory interest due must also be calculated for each one of these hold over years. The complexity is increased because HMRC’s late payment interest tracks the Bank of England rate of interest which in recent years has fluctuated frequently.

All this assumes that you have the relevant information to hand, but this is not always the case. Inadequate record keeping by the tenant and changes in its personnel can make it difficult to establish what rent and SDLT was paid historically. When submitting the holdover SDLT returns to HMRC, the “UTRN” (the unique transaction reference number for the SDLT return) of the original lease will also be needed, which may be difficult to track down.

Also, what if your original lease was not already notifiable for SDLT purposes? In some cases, we’ve seen one of the years of holding over triggers the obligation to pay SDLT on a lease that was previously below the relevant SDLT thresholds. That original lease must then be notified, and SDLT (and any interest and penalties) paid.

The calculation of SDLT on holding over depends entirely on the facts. If, for instance, there has been a renewal lease, was it backdated to the expiry of the old lease? Did the new lease’s term commence on the date of grant or was it backdated to some other date in between? Was the period of holding over less than a year? Was the old lease contracted out from the Landlord and Tenant Act 1954? Is the renewal lease linked to another lease? All these impact the calculation of the liability and it is often difficult to establish the fact pattern.

But establishing these facts as quickly as possible is crucial because the tenant only has a 14-day window in which to pay the SDLT and submit the SDLT return from date of grant (or the effective date). The pressure is on.

The moral of the story: where you hold over a lease there will be SDLT consequences and the longer the holding over the more of a headache those SDLT issues will be. The sooner the issue is dealt with, the more straightforward, as well as less expensive in terms of interest and penalties, it will be.