Premiums on leases

Produced by Tolley
Premiums on leases

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

  • Premiums on leases
  • Outline
  • Premiums on short leases
  • Grant of a sublease
  • Tax relief for tenant
  • Deemed lease premiums
  • Payment of tax on lease premium by instalments
  • Lease surrender
  • Sale with right to reconveyance
  • Reverse premiums
  • More...

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:

  1. premiums on 'short' leases (leases with 50 years or less to run)

  2. sums paid for the surrender of leases

  3. mismatches between sale proceeds with price for reconveyance to the vendor, or person connected with the vendor

  4. 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 the capital gains treatment of premiums paid on the grant of a lease, see the Grants 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 a receipt of the landlord’s UK or overseas property business. If the landlord does not have such a business, then it is treated as doing so. The proportion of the premium is taxed in the tax year or accounting period of the grant of the lease.

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 income is 2% for each complete year by which the term of

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