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HMRC internal manual

Employment Income Manual

Living accommodation: avoidance area: lease premium cases

Section 105 ITEPA 2003

In these cases the employer takes a short lease on living accommodation from a third party. Instead of paying the market rent for the property the employer pays a large premium and a small annual rent. It is argued that none of the premium can be treated as rent for the purpose of measuring the cash equivalent of this benefit.

An example will illustrate the point. A London flat owned by a third party has a market rental value of £25,000 per annum and gross rateable value under the old rating system of £800. An employer enters into a 3 year lease with the third party paying a premium of £75,000 and a rent of £100 per annum. The employer then provides the flat rent free to an employee. The cash equivalent of the benefit is the higher of:

  • the gross rateable value and
  • the actual rent payable.

It is argued that the cash equivalent of the living accommodation benefit is £800 gross rateable value because none of the £75,000 can be treated as rent.

In some circumstances we might wish to argue that the premium should be treated as rent. (This content has been withheld because of exemptions in the Freedom of Information Act 2000)

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Section 71 Finance Act 2009

Section 71 amended section 105 ITEPA and inserted new sections 105A and 105B to ensure that where a lease premium is paid for a lease with a term of 10 years or less, the same tax treatment will follow as if the lease premium were rent paid and spread over the duration of the lease. The legislation also applies to a lease premium paid for a lease with a term exceeding 10 years where the lease contains a provision that gives a person the right to terminate it which is capable of being exercised in such a way that the term of the original lease is 10 years or less.

The special rules apply to a premium payable under a lease entered into on or after 22 April 2009 or on the extension of the term of an existing lease on or after that date. See EIM11444 for an overview of the FA 2009 changes.