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HMRC internal manual

Property Income Manual

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HM Revenue & Customs
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Premiums: lease granted on or after 25 August 1971: taking a longer period than the term of the lease

Summary

This page is about circumstances when the length of a lease is to be taken as a period longer than its stated term for the purposes of the charge on premiums etc. It applies to leases granted on or after 25 August 1971 - see PIM1206.

* If the terms of the lease include provisions under which the tenant can give notice to extend the lease beyond a certain date: you may take into account any circumstances that make it likely that it will in fact be extended.
   
* If the tenant (or a ‘connected person’) is or may be entitled to a further lease of the same premises: you may treat the lease as expiring at the end of the further lease.

The legislation is in ICTA88/S38 and ITTOIA05/S303 onwards.

Extension of the lease

The terms of a lease may include provision for its extension beyond a given date at the option of the tenant. If so, you may take into account any circumstances that make it likely that it will in fact be extended when you consider the length of the lease for the purposes of the treatment of premiums.

Example

On 13 June 2004, Mary grants a one year lease of a property to Neil for a premium of £500,000 and a rent of £100, and under the terms of the lease, Neil has the right to extend the lease for a further 55 years without premium at a rent of £100 a year.

As Neil is likely to exercise his right to the extension, the duration of the lease is treated as 56 years. In consequence:

  • there is no chargeable amount included as Schedule A property income since the lease is for more than 50 years, and
  • Neil gets no relief for the premium paid.

Successive leases

The lease premiums legislation prevents premium relief being obtained for what is in effect a long lease by granting two shorter leases. One lease for say two years might require a premium to be paid and also entitle the lessee to a second lease for 97 years without payment of a further premium. This device could otherwise be used by lessors who were not effectively taxed on premiums, for example charities. Meanwhile the tenant would obtain relief for the premium paid.

The legislation applies where the tenant or a ‘connected person’ (as defined in ICTA88/S839) is or may be entitled to a further lease, whenever commencing, of the same premises, or of premises including all or part of the same premises. In such a case, you may take the term of the first lease as not expiring before the end of the term of the further lease.

If the two leases run consecutively, or overlap, you may take the duration of the first lease as including the duration of the further lease.

The premium payable for the combined lease may be taken as including any premium payable for the further lease. If the further lease includes other premises, include only a proportionate part of the premium. The premium on the second lease might be payable on the expiry of the first lease. But it is treated under ICTA88/S24 (3) and ITTOIA05/S306 (5) as being a premium for the first lease and is therefore chargeable under the lease premium rules at the time when the lease is first granted.

For information about claims for relief for premiums paid see PIM2300 onwards.