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HMRC internal manual

Property Income Manual

Other sums treated like premiums: Lease requiring tenant to carry out work on premises


The terms on which a lease is granted may require the tenant to carry out work on the property. Without special rules, a landlord could impose such terms to avoid tax instead of charging a premium. This page tells you when the value of such work must be treated as if it were a premium, and how the amount is calculated. It also tells you where to find guidance on the procedure you should follow in determining the amount involved.

The statutory provisions are in CTA09/S218 and ITTOIA05/S278.

When the rule applies

The rule applies if:

  • a lease is granted subject to terms imposing on the tenant an obligation to carry out any work on the premises, and

  • the cost of the work concerned would not be deductible by the landlord as an expense of the rental business, if the landlord had paid for it.

What charge is imposed

The landlord is treated as if the lease had required the payment of a premium, in addition to any actual premium. The amount is the difference between:

  • the value of the landlord’s interest in the property immediately after the commencement of the lease, and

  • the value of that interest if the lease had not required the tenant to do the work.

Ascertaining the increase in value

The amount treated as a premium is the amount by which the value of the landlord’s interest is enhanced immediately after the commencement of the lease. This may not equal the cost to the tenant of doing the work. A number of factors may affect it.

  • When will the landlord actually enjoy the benefit of the work? When the property eventually reverts to him? When rent reviews occur, so that a greater rent can be expected?

  • The length of any head lease - there will be not much benefit to an intermediate landlord if the head lease expires soon after the sub-lease.

  • The nature of the work - some improvements may be of a temporary nature, such as installing a shop front suitable only for the business of the tenant, and will not be likely to give rise to a charge.

  • Were the tenant’s works under the sub-lease also required by the head lease?

If you need advice from the Valuation Office Agency in connection with the valuation of the landlord’s interest, please follow the guidance in PIM1232.

The procedure you should follow

The compliance worker should ascertain details of the tenant’s expenditure. Distinguish sums qualifying for capital allowances. Also obtain any valuation of the resulting landlord’s interest. This will allow the compliance worker to ascertain whether a charge is applicable and to what extent.


Jozef lets a shop to Milka from 6 January 2007 for 11 years at a rent of £300 per month. She is also required to have tarmac laid on the area at the rear of the premises to be used as a new car park, and it costs her £5,000.

Jozef could not have deducted the cost of laying the tarmac in his rental income computation since it is capital expenditure. He is treated as if he had received a premium equal to the extra value of his interest in the property immediately after the commencement of the lease. The increase in value is agreed to be £3,000 (not the cost of the work) to reflect the wear and tear that the improvement will have suffered by the time the lease falls in and the restating of that reduced amount to present value. Jozef’s rental income computation must include the following:

Deemed premium receivable £3,000
less £3,000 x (11 - 1) / 50 £ 600
Chargeable amount of premium £2,400
Add actual rent for three months £ 900
Total £3,300



If the terms of the lease also require her to redecorate the premises every three years, this does not result in a charge under this provision. Jozef could have deducted the cost if he had paid it.