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HMRC internal manual

Property Income Manual

Premiums: How are premiums taxed?

Tax on premiums & similar receipts

Premiums received upfront for the grant of a lease of 50 years or less are liable to tax on a special basis.

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.

Why premiums are relevant to 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 charges 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 PIM2240 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 CG70700P onwards.

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 PIM2240 onwards, (CTA09/S227 and ITTIOA05/S287 onwards).