PIM2250 - Deductions: premiums paid: payer sublets and receives a premium
ITTOIA05/S292 and CTA09/S232
Calculating the relief due
There are four steps to working out how much relief is due.
1) Work out the chargeable amount of the premium paid
The chargeable amount of the premium paid must be calculated - that is the amount of the premium on which the superior landlord is taxed (or would be if they were chargeable). This is referred to as the ‘taxed receipt’ in ITTOIA05/S292 and CTA09/S232. To work out the chargeable amount you need to know the amount of the premium and the length of the lease. The calculation is described in PIM1205.
2) Work out what fraction of the chargeable amount has to be relieved for the period of the sub-lease
A fraction of the chargeable amount is relieved against the premium received for the sub-lease. The fraction is:
length of lease / length of head lease X chargeable amount
So for example, if the head lease was for 25 years and the intermediate landlord sublets for 10 years, then 10 / 25 of the chargeable amount is relieved. (It may be that the intermediate landlord will sublet again after the 10 years are up in which case the balance of the relief due to him under step 1 above will be allowable against rents received in the last 15 years of the head lease.)
3) Set the relief against the charge on the premium received
The intermediate landlord is charged on the premium received from the sublease (the ‘later chargeable amount’). That charge is reduced by the relief for the premium paid. See example 1 below.
If the relief exceeds the charge on the premium received, go on to Step 4.
4) Spread any balance of relief due over the period of the sublease
Only apply this step if the relief will completely cover the charge on the premium received. The balance of the relief is then treated as if it were rent payable day by day over the whole of the period of the sublease, in addition to any actual rent, and relieved accordingly. See example 2 below.
Liaison with other offices
What to do about checking the chargeable amount of the premium with the office dealing with the superior landlord is covered at PIM2320.
Part only of premises sublet
It is possible that the intermediate landlord pays a premium for premises and only sublets part of the premises. (For example he may pay a premium for a house, live in one part of it himself and let out another part.)
This is covered in ITTOIA05/S294 and CTA09/S234. In this case the amount relieved is an appropriate fraction only of the amount chargeable on the superior interest. The fraction is that attributable to the part of the premises concerned, on a ‘just apportionment’.
Successors in title
The relief is available to the intermediate landlord/tenant for the time being. If part way through the term of a lease, a taxpayer assigned his or her interest in the property, the new lessee would then get the relief under ITTOIA05/S292 or CTA09/S232.
Example 1
Eric grants to Fiona a 25-year lease of a factory for a premium of £60,000 and an annual rent of £1,000. Fiona sublets it to Hadrianus for 5 years and charges a premium of £20,000.
Step 1
Work out the chargeable amount of the premium received by Eric. This is £31,200 calculated using the formula in PIM1205
Step 2
Work out what fraction of the chargeable amount has to be relieved. This is calculated as follows:
length of sublease/length of head lease X chargeable amount
= 5 years / 25 years X £31,200
= £6,240
Step 3
Set the relief against the charge on the premium received. Fiona would have been charged £18,400 for the premium received (the later chargeable amount) but this is reduced by the £6,240 relief.
Chargeable amount of premium: £18,400
Less relief for premium paid: £6,240
Amount finally chargeable: £12,160
Step 4
is not required in this case.
Example 2
Harold grants Iris a 25-year lease of a warehouse for a premium of £50,000 plus annual rent. Iris sublets to John 15 years from 1 January 2020, charging a premium of £20,000.
Step 1
Work out the amount chargeable on Harold. This is £26,000 calculated using the formula in PIM1205.
Step 2
Work out the fraction of the chargeable amount to be relieved. It is calculated as:
length of sublease/length of head lease X chargeable amount
15 years / 25 years X £26,000
= £15,600
Step 3
Set the relief against the charge on the premium received. Iris would have been charged £14,400 for the premium received (the ‘later chargeable amount’) but this is completely covered by the £15,600 relief leaving £1,200 still to be relieved.
Chargeable amount of premium: £14,400
Less relief for premium paid: £15,600
Amount still to be relieved: £1,200
Step 4
Spread the balance of the relief over the period of the sublease. Iris gets one-fifteenth of the balance each year.
Relief in a full year:
1 year / 15 years X £1,200
= £80
For the 2019-20 year, the amount of relief is apportioned to take in account that when the sublease was granted (1 Jan 2020) there was only 95 days of the 2019-20 tax year remaining.
Therefore, relief in 2019-20 is is calculated as follows:
95 days / 365 days X £80 = £21