Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Property Income Manual

From
HM Revenue & Customs
Updated
, see all updates

Other sums treated like premiums: Sums payable in lieu of rent or for surrender of a lease

Summary

This page is about two circumstances in which a payment is to be charged as if it were a premium. These are when the terms under which a lease is granted require a payment to be made:

  • in lieu of the whole or part of the rent for any period, or
  • as consideration for surrender of the lease.

Without special rules, a landlord could impose such terms to avoid tax by effectively charging a premium, which took another form. A charge may arise even if the lease is for a period of more than 50 years. See below for details.

The case where payment is made but not under the terms of the lease is dealt with at PIM1216.

Payments dealt with in this page are covered by ICTA88/S34 (4), ITTOIA05/S279 and ITTOIA05/S280.

If a tenant has to pay a sum under the terms of a lease:

  • in lieu of the whole or part of the rent for any period (ie in commutation of rent), or
  • as consideration for the surrender of the lease,

then the landlord is treated as though the lease had required payment of a premium of that amount.

Top of page

Timing

The taxable amount of the payment is treated as if it were rent due when the sum became payable, not at the commencement of the lease .

Top of page

Period to be taken as the period of the lease

The period to be taken as the period of the lease is as shown below.

  • If the payment is in commutation of rent for any period, treat the period as being the period for which payment of rent would have been made if it had not been commuted, see example 1 below.
  • If the payment is for surrender of the lease and the lease was granted on or after 25 August 1971, treat the period as being for the whole period of the lease unless the lease is to be regarded as for a shorter period (see PIM1206). Where the lease is to be regarded as for a shorter period than the term of the lease, treat the period as being from the commencement of the lease to the date of surrender, see example 2 below.
  • If the payment is for the surrender of the lease and the lease was granted before 25 August 1971, treat the period as being from the commencement of the lease to the date of surrender.

Example 1

On 1 April 1990, Jonathan granted a 21-year lease of a shop to Fiona. The rent was £10,000 a year payable half-yearly in advance. Under the terms of the lease, the rent for any period may be commuted on payment of a sum to be fixed. On 31 March 2004 Fiona agrees to pay Jonathan £35,000 in commutation of four years’ rent.

Jonathan will be taxed as if rent of £32,900 was due on 31 March 2004, in addition to the rent of £10,000 included in the 2003-04 computation. The calculation is:

Deemed premium receivable £35,000
   
less £35,000 x (4 - 1) / 50 £2,100
Chargeable amount of premium £32,900
Add rent for year ended 31.3.04 £10,000
Total £42,900

Example 2

Geraldine grants to Hugh a 70-year lease of a shop at a rent of £25,000 per annum from 1 January 1993. The lease includes an option for it to be surrendered after 10 years on payment of £60,000. The rent, after the initial 10-year period increases to £100,000 per annum. It is agreed that a premium of £60,000 is not substantially greater than would have been the case for a 10-year lease.

The lease was surrendered on 31 December 2002. Geraldine will be treated as if she had received rent of £49,200 on 31 December 2002, in addition to the nine months rent for this year, calculated like this:

Deemed premium receivable £60,000
   
less £60,000 x (10 - 1) / 50 £10,800
Chargeable amount of premium £49,200
Add actual rent for nine months to 31.12.02 £18,750
Total £67,950