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HMRC internal manual

Employment Income Manual

Living accommodation: lease premium cases: overview of changes made by Section 71 FA 2009

Section 71 FA 2009 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.

Section 105(4) and (4A) ITEPA

These provisions apply where a rental amount is payable by the person at whose cost the accommodation is provided (“P”) in respect of the whole or part of the taxable period (“the relevant period”) at an annual rate greater than the annual value of the accommodation.

For the meaning of annual value see EIM11432.

For the meaning of taxable period see EIM11428.

In these circumstances, the cash equivalent to be treated as earnings from the employment will be the difference between the rental amount payable by P and any sum made good by the employee to P that is properly attributable to the provision of the accommodation. From the 2017/18 tax year the latest date for making good when calculating the taxable value of the benefit of living accommodation is 6 July following the tax year in which the accommodatoin is provided.

Section 105(4B) ITEPA

Subsection (4B) defines “rental amount payable by P” as the sum of any rent for the relevant period payable by P and any amount attributed to the period in respect of a lease premium.

Sections 105A and 105B ITEPA

These provisions contain the detailed rules for attributing an amount to the relevant period in respect of a lease premium. For these purposes, lease premium means any premium payable under a lease or otherwise under the terms on which a lease is granted and in Scotland includes a grassum.

Interaction with Section 106 ITEPA

Section 106 applies where the cost of providing living accommodation exceeds £75,000. As the amount of a premium represents the cost of acquiring a leasehold interest, it is a cost of acquiring property for the purpose of determining the cost of providing living accommodation (see EIM11429). EIM11480 explains how to calculate the amount of the living accommodation benefit under Section 106. The first step in the Section 106 calculation is to calculate what would be the cash equivalent if Section 105 applied. An amount attributed in respect of a lease premium will therefore be included in the cash equivalent of the benefit regardless of the cost of providing the accommodation.

The second step in Section 106 is to calculate the additional yearly rent. Extra Statutory Concession A91 (ESC A91) only applies where the cash equivalent of the benefit of the accommodation is calculated by reference to the annual rent the property might fetch on the open market. It does not apply where the cash equivalent is calculated by reference to a lease premium. It follows that the cash equivalent of the benefit will include the additional yearly rent in lease premium cases to which Section 106 applies.

Further guidance

See EIM11445 onwards for a detailed description of the rules and examples of how the rules apply in practice.