Nominal leases

Outline

Properties let at an uncommercial rent are also called nominal leases or peppercorn rents. This is the case where the owner of the property rents the property at a less than market value rent (eg to a family member) or often by way of ground rent on a long lease.

Ground rents will generally be regarded as commercial, and taxed as property income. However, letting the property at less than market value will have other considerations.

Note that companies within the transfer pricing regime may also have to consider the transfer pricing provisions if a property is let at less than a market rate. See the Transfer pricing rules ― overview guidance note.

Income and corporation tax position

If a property is let on uncommercial terms, strictly any expenditure is not incurred wholly and exclusively for the property business and so would not be deductible. However, HMRC are prepared to allow the expenses to be deducted up to the amount of the rent, ie so that the net income is nil. The expenses cannot create a loss and any excess expenses cannot be carried forward for deduction from income in a later year.

Furthermore, for corporation tax purposes there is a specific requirement that in order for a property loss to be relieved, it must relate to a property business carried on either on a commercial basis, or in the exercise of a statutory function.

VAT

If property is sold at less than a market price,