What is a reverse premium?
Particularly during times of economic recession, landlords often offer inducements such as capital payments to their prospective tenants. Any such payment by the landlord is called a 'reverse premium' if it is made in connection with a transaction that gives the recipient (or a person connected with the recipient) an estate, interest or right over land1.
It is important to correctly categorise an item as a reverse premium correctly, given that they are classified as revenue items, despite being connected with capital. HMRC provides guidance on what constitutes a reverse premium2. In general, the legislation will only tax benefits procured by the actual laying out of money. It does not catch receipts that represent amounts foregone or deferred by the landlord, such as rent-free or reduced rent periods. The reason for this is that the smaller deduction charged to the tenant's profit and loss account for the reduced rent payable will already reflect the inducement, thereby increasing the profit.
In addition, the replacement (by agreement) of an existing lease at an onerous rent or with onerous conditions, with a new lease at a lower rent or without the onerous conditions is not a reverse premium3.
Inducements which are taxable, apart from cash payments, are:
• a contribution specified to be towards a tenant's costs, such as start up, fitting out (see below) or relocation
• assumption by the landlord of the tenant's liabilities under an existing lease