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HMRC internal manual

Property Income Manual

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HM Revenue & Customs
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Deductions: premiums paid: payer sublets and receives a premium

Summary

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). In the Property Income Manual this is called the ‘amount chargeable on the superior interest’. 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 sublease x amount chargeable on superior interest
     
length of head lease    

So for example, if the head lease was for 25 years and the intermediate landlord sublets for 10 years, then 10 / 25 (or 2 / 5) 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 period of the sublease, in addition to any actual rent, and relieved accordingly. See example 2 below.

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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 PIM2340.

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Legislation - IT cases to 2004-05 and CT cases

  • ICTA88/S37 (2) provides for the premium charge to be reduced by the appropriate fraction of the amount chargeable on the superior interest and ICTA88/S37 (7) defines the fraction.
  • ICTA88/S37 (5) governs the case where the relief exceeds the charge - the balance is relieved under ICTA88/S37 (4).
  • 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).

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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 (3). 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’.

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Successors in title

If part way through the head lease the intermediate landlord assigns his interest to someone else, the successor becomes the intermediate landlord and gets relief.

The new intermediate landlord has not received a premium, and gets relief under ICTA88/S37 (4). ICTA88/S37 applies whenever tax has become chargeable under the provisions of ICTA88/S34 or S35 in respect of the lease. ICTA88/S37 (4) gives relief to the person for the time being entitled to the head lease. The relief is based on spreading the amount chargeable on the superior interest over the whole of the head lease. This is dealt with in PIM2310.

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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/S288. ITTOIA05/S289 deals with the case that part only of the premises is sublet.

If the relief exceeds the charge on the premium received the balance is relieved under ITTOIA05/S292.

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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 George 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 like this:

Premium receivable £60,000
   
less £60,000 x 25 - 1 / 50 £28,800
Chargeable amount of premium £31,200

Step 2

Work out what fraction of the chargeable amount has to be relieved. This is:

length of sublease (5 years) x £31,200 = £6,240
     
length of head lease (25 years)    

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.

Premium receivable £20,000
   
Less 20,000 x 5 - 1 / 50 £1,600
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.

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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 2004, charging a premium of £20,000.

Step 1

Work out the amount chargeable on Harold. This is £26,000 calculated like this:

Premium receivable £50,000
   
less 50,000 x 25 - 1 / 50 £24,000
Chargeable amount of premium £26,000

Step 2

Work out the fraction of the chargeable amount to be relieved. It is:

length of sublease x £26,000 = 15 x £26,000 = £15,600
         
length of head lease   25    

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.

Premium receivable £20,000
   
less 20,000 x 15 - 1 / 50 £5,600
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 full year 1 / 15 x £1,200 = £80
     
Relief in 2003-04 95 / 365 x 1 / 15 x £1,200 = £21