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HMRC internal manual

Employment Income Manual

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Living accommodation: lease premium cases: detailed attribution rules: when to attribute an amount in respect of a lease premium

See EIM11444 for an overview of the changes made by Section 71 FA 2009.

An amount in respect of a lease premium can only be attributed to a relevant period where all four conditions in Section 105A(1) ITEPA are satisfied:

  • The property consists of premises, or a part of premises, that are subject to a lease.
  • The premises are not mainly used by P for a purpose other than the provision of living accommodation to which Part 3 Chapter 5 ITEPA applies.
  • The lease is for a term of 10 years or less.
  • The net amount payable by P in relation to the lease by way of lease premium is greater than zero.

“P” is the person at whose cost the accommodation is provided.

“The relevant period” is the whole or part of the “taxable period” - see EIM11428.

Property consists of premises, or a part of premises, that are subject to a lease

In this context, “the property” means the property consisting of the living accommodation. To satisfy this condition, the living accommodation must be subject to a lease whether it comprises the whole of the premises or forms only a part of larger premises. In practice, deciding if the first condition has been satisfied should be straightforward.

Premises not mainly used by P for a purpose other than the provision of living accommodation

This condition prevents the attribution of an amount in respect of a lease premium where the main use of the premises by P is for a purpose other than the provision of living accommodation to which Part 3 Chapter 5 ITEPA applies.

The construction of the premises will often be such that a separate part is clearly designed and used for business use rather than living accommodation. An example would be premises consisting of a shop with a flat over it. In such a case the living accommodation is only the flat above the shop and does not include any of the shop below.

“Mainly” takes its everyday meaning as “for the most part” and all relevant factors should be taken into account. It will therefore be necessary to identify the proportion of the premises used by P for providing living accommodation and the proportion actually used for other purposes. Remember that the legislation is concerned with actual use of part of the premises for other purposes and not mere provision for other purposes. Generally, it should be sufficient to compare the area of the living accommodation with the area of the whole premises. However, the specific facts may indicate that P mainly uses the premises for other purposes even where living accommodation takes up more than 50% of the area of the whole premises. For example, it may be clear that the value of the part of the premises used for other purposes is significantly greater than the value of the part used as living accommodation such that the provision of living accommodation clearly represents an ancillary activity.

Note that any part of the premises used by P for providing living accommodation to an employee entitled to one of the statutory exemptions set out at EIM11331 is used for a purpose other than the provision of living accommodation to which Part 3 Chapter 5 ITEPA applies. For example, if the premises consist of a three storey building with a shop at ground floor level, a first floor flat provided to an employee entitled to an exemption and a second floor flat provided to an employee who is not entitled to an exemption, only the second floor flat is living accommodation to which Part 3 Chapter 5 applies.

Lease is for a term of 10 years or less

The term of the lease will usually be clear. However it is subject to the special rules in Section 105B ITEPA which determine the term of a lease that contains one or more relevant break clauses. A relevant break clause is a provision of a lease that gives a person a right to terminate the lease which can be exercised in such a way that the term of the original lease will be 10 years or less. For the purposes of Section 105A, it is assumed that any relevant break clause is exercised in such a way that the term of the lease is as short as possible.

For example, if the term of a lease is stated as 15 years but there is a relevant break clause which would allow a person to terminate the lease after 5 years, the term of the original lease is determined as 5 years for the purposes of Section 105A.

Net amount payable by P in relation to a lease by way of lease premium is greater than zero

Section 105A(4) defines the above expression as the total amount (if any) that has been paid, or is or will become payable, by P in relation to the lease by way of lease premium, less any of that amount that has been repaid or is or will become repayable. In practice, where there is a premium payable under a lease, determining whether this condition has been satisfied should give little difficulty.

Where all four conditions are satisfied, EIM11446 explains how to calculate the amount to be attributed to the relevant period.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)