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HMRC internal manual

Property Income Manual

HM Revenue & Customs
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Deductions: premiums paid: introduction


It is explained in PIM1200 onwards that there are special rules to charge lump sums (premiums) a landlord receives in connection with a lease they grant to a tenant. There is also a corresponding relief for the landlord where they (or an earlier tenant) paid a premium to their own landlord when he or she granted their lease, and they are subletting the property in their rental business. This applies where the landlord themselves rents property from a superior landlord and then sublets that property so that the income forms part of their rental business income, (ICTA88/S37 and ITTOIA05/S287 onwards).

The premium charging and relieving rules don’t apply were a taxpayer sells their lease - what lawyers call an ‘assignment’ of the lease. 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 two main premium relief cases:

* Where the taxpayer receives no premium themselves; they simply get an annual rent for the grant of the sub-lease see PIM2310;
* Where the taxpayer also receives a premium themselves see PIM2320.

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Relief for premiums paid

If a landlord receives a premium for the grant of a lease of 50 years or less, a part of it will be treated as property income just as if rent had been received. This is explained in PIM1200 onwards.

Correspondingly, the payer of the premium may get relief for part of the premium. If the lease is assigned to someone else there may also be relief for the successor.

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 PIM2310;
* 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 PIM2320;
* 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 PIM2330.

Relief is available both for actual premiums, and in respect of other payments that are taxed as if a premium had been paid, - see PIM1210 onwards.

Liaison is necessary between the offices dealing with the payer and the recipient. For details of the procedure to be followed see PIM2340.