PIM1206 - Premiums: lease granted on or after 25 August 1971: term of lease treated as shorter than stated

Summary

The length of a lease is normally treated as being equal to the term for which it was granted. This page and PIM1207 explain when you need to treat some different periods as the length of a lease for the purposes of the charge on premiums etc. They apply to leases granted on or after 25 August 1971. If you need to know about a lease granted before 25 August 1971:

  • see PIM1208 for leases granted after 12 June 1969 but before 25 August 1971,
  • see PIM1209 for leases granted on or before 12 June 1969.

You may have to treat the lease as if it ended on a date before its expiry

If the terms of a lease make it unlikely that it will continue beyond some date earlier than its actual expiry date treat it as if it expired on the earlier date.

But you must think about the amount of the premium compared with what might have been expected on certain assumptions. The provisions relating to the length of leases for the purposes of the charge on premiums etc. are in CTA09/S243 and ITTOIA05/S303 onwards.

Lease unlikely to continue beyond a date earlier than its expiry date

You have to treat the lease as if it had been granted for a term ending earlier than its expiry date, if two conditions are met, that is:

  1. there are terms in the lease, or other circumstances, which make it unlikely that the lease will in fact continue beyond some date earlier than the expiry date, and
  2. the amount of the premium is not substantially more than it would have been for expiry on the earlier date; (‘substantially’ is an imprecise word intended to protect the genuine arms-length lessor and lessee).

You should:

  • apply these rules only by reference to facts known or ascertainable at the time the lease was granted,
  • assume that all the parties were acting as they would if they were at arm’s length,

  • take no account of certain benefits which might be conferred in connection with the lease,

    • The benefits concerned are any other than (i) for the tenant, vacant possession and beneficial occupation, or (ii) for the landlord, the right to receive rent at a reasonable commercial rate.
    • Assume that these benefits would not have been conferred if the lease had in fact been for the shorter term. In other words, ignore terms that might have the effect of boosting the open market premium when considering whether the premium is more than would be expected for a lease for the shorter term. Examples of such terms or arrangements are the right on a ‘break’:
  1. to a new lease (which might be on more favourable terms so as to make the ‘break’ more likely), or
  2. to a lease of some more desirable property, or
  3. the right to a refund of the premium, with or without interest.

Please note that abnormal benefits and payments are only taken into account if they were not conferred or made to obtain a tax advantage. The onus to show that this is the case is on the person claiming the shorter period.

For information about claims for relief for premiums paid see PIM2240 onwards.

You may have to treat the lease as if it ended on a date later than its expiry date

This is covered in PIM1207.

HMRC Submissions

Submit to Business Assets and International Directorate (BAI) in any case of doubt or difficulty. For information on how to make a submission to BAI please see here (link is internal to HMRC).

Contact the Valuation Offie Agency (VOA) in cases where a valuation is needed of the open market premium for the likely shorter period of the lease. For information on how to contact VOA please see here (link is internal to HMRC).