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HMRC internal manual

Property Income Manual

Deductions: premiums paid: payer sublets without receiving premium


There are two steps to working out how much relief is due.

1) Work out the chargeable amount of the premium

The chargeable amount of the premium must be calculated - that is the amount of the premium on which the superior landlord is taxed (or would be if he were chargeable). You need to know the amount of the premium and the length of the lease. The calculation is described in PIM1205.

2) Spread the chargeable amount over the period of the sublease

The chargeable amount is treated as if it were rent for the property (in addition to any actual rent) which becomes due from day to day throughout the period of the head lease. This will be a deduction in computing the rental business profit if the property is let or otherwise used for the purposes of the rental business.

For example, the taxpayer gets a deduction of £1,000 a year for notional rent if the premium chargeable on their landlord as rental income is £10,000 and their lease lasts ten years in all, (ICTA88/S37 and ITTOIA05/S287 onwards).

A notional rental deduction for a premium paid to the landlord is due to the current tenant under the head lease even if a different tenant under the head lease paid the premium to the landlord (or even to a previous landlord who granted the head lease). The notional rental deduction is set against the rent that the current tenant is due to receive under the sublease he or she granted (or took over). A taxpayer can’t claim relief for a lump sum (even if called a ‘premium’) they paid to a previous tenant to take over his or her lease. Relief is based on the premium that was paid (if any) to the landlord for the grant of the lease in the first place.

The notional rental payment allowed as a deduction is split on a reasonable basis where the tenant only sublets part of the property for which the premium was paid. Professional valuation advice on the split may be needed in sizeable or difficult cases.

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Example: relief for premium paid where no premium received

On 25 April 2000 David, the owner of Tower Farm, grants Richard a lease of the whole property for 21 years. Richard has to pay David, his landlord, a premium of £20,000 and a rent of £4,000 a year.

David is chargeable up front on premium income of £12,000. This is the total premium of £20,000 less 40%; the 40% is found by taking one year less than the life of the lease (20 years) and multiplying by 2%, see PIM1200 onwards.

David is also chargeable on the rent of £4,000 a year.

Richard sublets Tower Farm to Robert for a rent of £7,000 a year. So we have:

  • David - the owner of the freehold of Tower Farm; he lets to:
  • Richard, the lessee; he sublets to:
  • Robert, the sub-lessee who actually occupies and farms Tower Farm.

Richard is taxable on the rent of £7,000 a year he gets from Robert. He can deduct each year both the annual rent of £4,000 he pays to David, his landlord, and an extra amount of notional rent of £571 each year. This extra deduction is found by dividing the amount of £12,000 chargeable on David by 21 years, which is the length of Richard’s lease of Tower Farm.

Richard and his successors in the tenancy under the head lease of Tower Farm can, therefore, deduct £4,571 each year in computing their profits or losses arising in their rental businesses.

A reasonable restriction in the premium relief deduction due must be made where the property is only partly used for business purposes - just as it must be made for any other expense. For example, suppose Richard (or his successor in title) occupies half of Tower Farm for private use and half is sub let. Here the amount deductible from the profits from the part sub let is half the total where the value of each half is the same. Professional valuation advice may be needed to determine what part, if any, of a premium relates to the let property.

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Liaison with other offices

PIM2340 tells you what to do about checking the chargeable amount of the premium with the office dealing with the superior landlord.

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Legislation - IT cases to 2004-05 and CT cases

  • The legislation is in ICTA88/S37 (4).
  • ICTA88/S37 calls the chargeable amount ‘the amount chargeable on the superior interest’.
  • ICTA88/S37 (2) & (3) do not apply when the intermediate landlord is not charging a premium.
  • ICTA88/S37 (1) (b) provides that the relief is due even when the superior landlord is not actually charged on the premium because of premium relief under ICTA88/S37 (2) or (3). Relief is also due if the landlord is exempt from tax, for example a charity.

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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 ICTA88/S37 (6). In this case the amount relieved under ICTA88/S37 (4) 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’ - ICTA88/S37 (3).

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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 ICTA88/S37. This is because ICTA88/S37 applies where ‘tax has become chargeable under the provisions of ICTA88/S34 or ICTA88/S35 in respect of the lease’. ICTA88/S37 (4) gives relief to ‘the person for the time being entitled to the head lease’.

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Legislation - IT cases from 2005-06

The scope of the legislation is unchanged.

The main relieving provision in this case is ITTOIA05/S292. ITTOIA05/S294 deals with the case that part only of the premises is sublet.