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HMRC internal manual

Capital Gains Manual

Leases: granting of: recipient of reverse premium

The recipient of a reverse premium will often contend that the receipt is not chargeable to tax. This contention may be correct, but not always. Each case must be considered on its own particular facts.

The first question to be considered is whether the receipt is chargeable as a trade receipt in the hands of a tenant who is granted the lease for the purposes of a trade, profession or vocation, or in all other circumstances as a receipt of a property business. Guidance on this question can be found at BIM41050 onwards.

If the receipt cannot be charged to Corporation Tax or Income Tax as a trade receipt, or receipt of a property business, you will need to consider whether it is chargeable to Capital Gains Tax.

It will only be so chargeable if it is derived from an asset held by the tenant. Normally, the reverse premium will be paid before the tenant has actually entered into the lease and in these circumstances it will not be possible to demonstrate that the reverse premium is derived from the lease. Unless there is some other asset from which the reverse premium derived, it will not be chargeable to Capital Gains Tax.

However, it is important to establish the full facts. It may, in some limited circumstances, be possible to show that the receipt derives from some capital asset other than the lease. Possible examples are:

  • the tenant may have surrendered an existing lease in order to take the new one and the receipt may, in reality, be for the surrender of the old lease;
  • the receipt may derive from the tenant’s goodwill.

The above examples are not exhaustive, there may be other possibilities depending on the precise facts of each case.