Premiums on leases

By Tolley
Corporation_tax_img7

The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Premiums on leases
  • Outline
  • Premiums on short leases
  • Lease surrender
  • Sale with right to reconveyance
  • Reverse premiums
  • Sale and leaseback

Outline

When a property investor grants a lease, potentially this could be done on the basis that the tenant pays a premium for the initial grant of the lease, in addition to also paying rent over the term of the lease. In the absence of specific legislation to the contrary, such premiums would all be regarded for tax purposes as a capital receipt. However, there is specific legislation to treat some or all of such premiums as income. There are also other situations in which the legislation treats sums paid in respect of interests in property as income which would otherwise be treated as capital. This guidance gives an overview of the tax treatment of the following:

  • premiums on 'short' leases (leases with less than 50 years to run)
  • sums paid for the surrender of leases
  • mismatches between sale proceeds with price for reconveyance to the vendor, or person connected with the vendor
  • sums paid by landlords for tenants to take on leases ('reverse premiums')

Premiums on 'long' leases (over 50 years) are treated in full as capital for tax purposes. For guidance on long leases, see the Sales of leases guidance note.

Premiums on short leases

Where a 'short' lease is granted under terms that a premium must be paid, a certain proportion of that premium is treated as rental income, taxed in the year of the grant of the lease.

CTA 2009, s 217

That proportion is found by the following formula:

Where:

Y is the number of complete periods of 12 months (other than the first) comprised in the effective duration of the lease.

In other words, the part of the premium charged as rental

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