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HMRC internal manual

Property Income Manual

HM Revenue & Customs
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Premiums: difference between granting and assigning a lease

A distinction is made between:

  • a premium paid for the grant of a lease, and
  • a capital sum paid on the sale of a lease.

A sale (or assignment) is a CGT matter (unless the taxpayer is carrying on a property dealing trade or PIM1222, PIM1224 or PIM1226 applies).

The difference between granting and assigning a lease

A person holding property freehold (a landlord) may grant a lease under which another person (the tenant) occupies the property for a certain time. When the lease expires, the property reverts to the landlord. The tenant might in turn grant a sub-lease under which he allows another person (a sub-tenant) to occupy the property for part of the term of the lease. At the end of the sub-lease the property reverts to the intermediate landlord (the head tenant) until the original lease (the head lease) expires. If the sub-tenant pays a lump sum to the intermediate landlord, that is a lease premium.

Alternatively, the head tenant might find someone to take over the head lease in his place. If he does, he does not grant a sub-lease, he assigns his lease. If he receives a lump sum payment for the assignment, that is not a lease premium.

It may not always be clear whether a lease has been assigned or whether a sub-lease has been granted. It is only an assignment of the lease if all the lessee’s interest in the lease for the whole of the rest of the term is transferred. Where a sub-lease is granted it is usual for it to expire not later than one day before the head lease comes to an end. Where a transfer purports to be an assignment, but is for a period of less than the remainder of the term, even if only one day less, it is not an assignment but a sub-lease.

Be careful when taxpayers or their agents refer to ‘selling’ a lease or leasehold property as this word may be used loosely. You should make enquiries to determine whether the lease has been assigned for the remainder of its term or whether a sub-lease has been granted.

Example distinguishing a premium from sale proceeds

Jeremy pays a premium of £10,000 to his landlord to obtain the grant of a lease of 21 years at a rent of £5,000 a year. The £10,000 is within the premium rules. Ten years later Jeremy sells the remaining eleven years of his lease to Robert for £8,000. That £8,000 is not a premium for the grant of a lease but the sale price of the lease and any gain or loss is dealt with under the CGT rules (unless Jeremy is a property dealer).