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HMRC internal manual

Property Income Manual

Other sums treated like premiums: Overview

Special kinds of premium

There are other kinds of receipt and other forms of consideration relating to leases of 50 years or less, which are treated like premiums. They must be included in the landlord’s rental business in the same way as an ordinary premium. These include:

  • the value added to the landlord’s reversionary interest in the property because the tenant agrees to spend money on improvements when the landlord grants the lease; the “reversionary interest” is the legal term for the rights the landlord has in the property after they grant the lease; this rule doesn’t apply to ordinary revenue repairs and maintenance; nor does it apply to temporary changes which only benefit the tenant’s particular trade,

  • lump sums in place of rent due under the lease,

  • lump sums for the surrender of the lease made under the terms under which the lease is granted,

  • receipts other than rent for the variation or waiver of the terms of a lease,

  • receipts for the assignment of a lease which was originally granted by the landlord at an under-value,

  • receipts for a freehold or a lease where the seller has a right to repurchase the property or to the grant of a lease back,

  • informal and “hidden” premiums (see below).

The rules are mainly aimed at attempts to side step the ordinary premium rules by providing substantially the same consideration in a different form.

Informal and “hidden” premiums

A premium for a lease must be included as part of the rental business whether or not it is mentioned in the written lease or other written agreements. Thus, for example, a purely oral arrangement under which the landlord gets a lump sum for handing over the keys will give rise to a premium charge. Any sum received in connection with the granting of a tenancy is presumed to have been received by way of premium unless it is shown to have been the price for something else.

The law looks at the substance of the matter and not at the form or the names used. For example, the landlord is treated as receiving a premium if they ask their tenants to pay more than the market price for, say, furniture, fixtures and fittings. By paying over the odds for the fixtures and fittings, the tenants are paying a “hidden” premium.

Usually, the landlord will simply let the property with the furniture etc for a rent and there will be no sale of assets to bother about. If the landlord does sell items to the tenant the premiums rules will not normally apply where the landlord makes a reasonable attempt to agree a fair price for everyday kinds of assets. But there is the possibility of a premium charge where, on any reasonable view, the landlord charges significantly more than the value of the assets or where the charge for the assets runs into thousands of pounds.

Example of a “hidden” premium

Nazish lets a flat to George for two years at a rent of £6,000 a year. Nazish also requires George to pay £5,000 for fixtures and fittings worth only £500. Nazish will be treated as receiving a premium of £4,500 (£5,000 less £500) and (apart from any allowable expenses) he will have to include in his rental business receipts of £4,410 (£4,500 x (50-1)/50)* for the year the flat is let, in addition to the annual rent of £6,000.

*to see how to calculate the portion of a premium that is taxable as property income please see PIM1205