SDLT - Tenants be careful when you take up early occupation

United Kingdom

Stamp Duty Land Tax (SDLT) is payable on the grant of a lease. To avoid the parties to a lease entering into an agreement forlease and then failing to complete it, thereby avoiding thepayment of SDLT, the relevant legislation provides a catch. The basic rule is that SDLT is payable on the effective date of a transaction. That is the completion of the transaction or earlier if there is "substantial performance". But what amounts to "substantial performance"?

If at any time before the lease is granted, 90% or more of the premium is paid (if there is one), that will amount to substantial performance.

If the first payment of rent is made prior to the grant of the lease this will amount to "substantial performance".

If the tenant goes into occupation prior to completion of the lease for trading this would also result in "substantial performance" of the agreement.

Whether going onto the premises to carry out fitting out works amounts to "substantial performance" is more of a grey area. If the tenant only has limited rights of access to carry out the works for example, on specified days at designated hours, then it is arguable that this does not amount to possession. The Inland Revenue equates possession with the tenant receiving keys to the door and having or being entitled to occupation.

Tenants should remember that if they have entered into an agreement for lease and take up occupation earlier than completion of the lease, this will be the "effective date" for SDLT purposes so that completion of an SDLT return along with payment of the SDLT will be required within 30 days of entry rather than 30 days of completion of the lease.