Premiums: what is a premium and why do we tax them?
Tax on premiums & similar receipts
Lump sums received upfront for the grant of a lease of 50 years or less are liable to tax on a special basis. Such receipts are generally called ‘premiums’, (ICTA88/S34 and ITTOIA05/S277).
The special basis also applies to other forms of consideration received in connection with the right to possession of a property. The amount chargeable under the special rules forms part of the income of the rental business. Any amount that isn’t chargeable to tax as part of the rental business is either:
- a trading receipt; this will be so if the taxpayer is carrying on a trade of dealing in land or property, or
- a capital receipt to which CGT may apply.
Difference between a premium and rent
A distinction is made between:
- a premium paid for the grant of a lease, and
- rent due under the lease.
Confusion can arise in certain unusual cases where rent is payable in advance and so looks like a premium at first sight. For more about unusual patterns of rental payments see PIM1101.
Relief for premiums paid
A landlord may also be entitled to relief against their own rental business income for premiums paid to obtain a property that is now let. In addition, this relief may apply where the landlord has acquired a lease for which an earlier tenant under that lease paid a premium. For more details see PIM2300 onwards, (ICTA88/S37 and ITTIOA05/S287 onwards).
What is a premium?
A lease is sometimes granted on terms that require the payment of both:
- a premium - a lump sum, and
- rent - regular payments.
In other instances, the lease may require only the payment of rent.
A premium is a sum paid on the creation of an interest in property. As such it is capital on normal principles. This led to landlords seeking premiums instead of rent to avoid IT. To counter this, the anti-avoidance legislation in ICTA88/S34 - S39 (now ITTOIA05 Part 3 Chapter 4 for IT payers) was introduced.
Premiums are more common in some parts of the country than others and you may meet them more often in respect of large commercial and industrial properties.
In Scotland, any provision relating to a premium also includes a grassum.
An Inspector should deal with any point involving premiums on leases and similar payments.
Why premiums are relevant to Schedule A and property income
A premium paid for a very long lease is clearly a capital sum. If it is paid for a shorter lease it has a character more like rent paid in a lump sum rather than periodically. It is more akin to income, and the shorter the lease, the more like income it is.
The Taxes Acts charge a proportion of a premium to tax as income. The proportion to be charged as income depends on the length of the lease. The shorter the lease, the greater the proportion to be charged. If the lease is for more than 50 years then none of the premium is treated as income. How the charge on premiums works is explained in PIM1205 which contains a straightforward example. As well as charging IT on the recipient of leases, the Act gives relief in some circumstances to the payer - see PIM2300 onwards.
Certain other sums are treated like premiums: see PIM1210 onwards.
There may be CGT consequences on both the assignment of a lease and the grant of a sub-lease, see CG71100 onwards.