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

HMRC internal manual

Property Income Manual

Deductions: premiums paid: overview

Overview

It was outlined in PIM1200 that where a landlord receives a lump sum (premium) when granting a lease, there are special rules whereby some of the premium may be charged to income tax. However, this is guidance is from the perspective of the person who paid a premium to a landlord. Where that person subsequently sublets the property in their rental business, relief may be available on the income received through the sublet for the premium previously paid. There is also relief when a landlord uses a property (for which a premium was paid on purchase of lease) in their rental business.

Please note these rules do not apply when a customer sells their lease – sometimes called an ‘assignment’. There may be either a capital gains charge, or possibly, a trading charge if the taxpayer deals in land.

The premium for which relief is due could have been paid either by the taxpayer or by any person who held the same lease at an earlier date. The following paragraphs outline how the relief works.

The relief for premiums paid is only due on amounts which are chargeable on the taxpayer’s landlord as income (or would be if he or she were liable to tax). Thus, for example, there can be no relief for a premium paid for a lease exceeding 50 years because the landlord is never charged in these cases. But relief is due for the payment of the rental income element in a premium even where it isn’t taxed on the landlord. This may happen, for example, because the landlord is a charity that is exempt from tax.

There are some sums that are taxed as if they are premiums (see PIM1210). Relief is available for these on the same basis as actual premiums.

Summary of relief available

The method by which the relief is given depends on the circumstances of the payer:

  • If the payer sublets the property concerned, but does not charge a premium, there will be some relief spread over the period of the sublease (see PIM2240).
  • If the payer sublets the property and does charge a premium, the relief first reduces the charge on the premium received, with any balance of relief due spread over the period of the sublease (see PIM2250).
  • If the payer is using the property for business purposes, then relief is given in computing the business profits, spread over the period of the lease (see PIM2300).