Deductibility of lease renewal costs

We are increasingly coming across renewal of leases and, in accordance with normal practice, we have claimed the professional fees as allowable although it is noted that HMRC manuals refer to ‘de minimis’ amounts.

Part of the cost of the renewal of a lease is the stamp duty land tax on the lease. This can be quite substantial, but why should the tax treatment not follow that of the professional fees and be deductible in the year in which incurred? Has this subject been discussed with HMRC because I think this must be an issue for future renewal.

Query 17,572 – Tom

Answer:

Stamp duty land tax payable on a lease renewal forms part of the incidental costs of the acquisition of the new lease and, as the lease is a capital asset, is part of the costs of acquisition falling within section 38 TCGA 1992. Section 38(2) provides that: ‘… the incidental costs to the person making … the acquisition of the asset … shall consist of expenditure wholly and exclusively incurred by him for the purposes of the acquisition … being fees, commission or remuneration paid for the professional services of any surveyor or valuer, or auctioneer, or accountant, or agent or legal adviser and costs of transfer or conveyance (including stamp duty or stamp duty land tax).’

If, as is likely, the lease is for a term of less than fifty years, it will be a wasting asset for capital gains tax purposes and the acquisition costs will be written off on a straightline basis over the term of the lease in accordance with section 46 TCGA 1992. In strictness, the same treatment should apply to the professional fees incurred in relation to a lease renewal. This is reflected in the Business Income Manual (at 46420 Professional fees: Renewal of leases [November 2005]) when giving concessionary treatment as a revenue deduction for ‘small’ amounts incurred on the renewal of a ‘short’ lease: ‘Professional fees incurred on the renewal of a short lease with the owner’s consent are capital but are likely to be small; in which event you may allow them on de minimis grounds.’

If successive leases of the same or substantially the same premises are granted (whether at the same time or at different times) and the grants are ‘linked’ transactions the SDLT provisions apply as if the series of leases were a single lease granted at the same time as the grant of the first lease for a term equal to the aggregate of all the terms in the series and in consideration of the rent payable under all the leases in the series. Tax will then be charged on that basis and credit given for any SDLT previously paid.

HMRC’s views on successive linked leases are set out at SDLTM17035. The lease resulting from a renewal will not be treated as linked with the original lease if it can be shown (with appropriate evidence) to have been negotiated at arm’s length.

In some cases, such as where the rent under the later lease increases, the linked leases rule will result in a lower charge to SDLT than if the leases were taxed separately. A tenant will never be worse off by taking two short leases rather than one longer one, and SDLT on the second lease can be, in effect, deferred.

Marilyn Merlot (Ann Humphrey)

First published in Taxation magazine Readers’ Forum www.taxation.co.uk