Leasing: avoidance: sale and leaseback of land: new lease after assignment or surrender
S681B-S681BM Income Tax Act 2007, S849-S862 Corporation Tax Act 2010
This anti-avoidance legislation deals with the situation where the existing occupier of premises incurs additional rental liability for a comparatively short period in return for receiving a lump sum.
- In form, the lump sum is the consideration received for assigning or surrendering the lease, usually to a charity or a pension fund, and the leaseback is for a short period at an increased rent.
- In substance, however, the lump sum is a loan and the additional rent represents the repayment of principal and interest.
The legislation applies to leasebacks:
- entered into on or after 22 June 1971,
- where the unexpired term of the original lease did not exceed 50 years, and
- the leaseback is for a period of 15 years or less.
Where the legislation applies, a proportion of the lump sum is treated as income of the recipient. See BIM61345.
For example, where a lease is for 15 years, 14/15ths of the lump sum is to be treated as a capital receipt of the lessee and 1/15th as an income receipt. In the case of leases for shorter periods, the capital element is to be correspondingly smaller and the income element greater.
A professional partnership:
- occupying offices under a lease which has 8 years to run,
- at a rent of £30,000 per annum,
- assigns the remainder of the lease to a pension fund for £200,000 on 1 June 2012, and
- is granted an immediate leaseback for 8 years less one day,
- for a rent of £70,000 per annum.
The commercial rental value of the premises on 1 June 2012 is approximately £100,000 per annum.
Since the rent of £70,000 per annum is less than the commercial rent, no restriction is required under the guidance at BIM61301 onwards.
The income proportion of the £200,000 is 8/15ths, that is, £106,666. It is treated as a receipt of the profession.
The balance of £93,334 is within the charge to Capital Gains Tax.