98 Treatment of premiums, etc as rent

Summary

Where a short lease (that is, a lease which does not exceed 50 years) requires the payment of a premium, a portion of the premium is treated as rent for the purposes of a charge to tax under Case V of Schedule D. The amount so treated is the premium reduced by 2 per cent for each complete period of 12 months, other than the first such period, comprised in the lease. Thus, in the case of a premium of €100,000 for a 41 year lease, the part of the premiums treated as rent is [€100,000 – (€100,000 × 2% × (41 – 1))] €20,000.

The section treats as the payment of a premium —

• a lump sum paid in place of full rent,
• a sum paid nominally for the surrender of a lease,
• a sum paid for the variation or waiver of any term of a lease, and

It should be noted that capital gains tax may arise on the part of the premium not treated as rent (see section 566 and Schedule 14).

Details

Treatment of premiums as rent

(1) Where a premium is payable under the terms of a lease or otherwise under the terms under which a lease is granted and the duration of the lease is 50 years or less, a portion of the premium is to be treated as rent. The lessor is treated as becoming entitled to the amount so treated as rent on the date the lease is granted. The amount to be so treated is the amount of the premium reduced by 2 per cent for each complete 12 month period of the lease, excluding the first 12 month period.

Deemed premiums

(2) Where the terms of a lease imposes on the lessee an obligation to carry out any work on the premises, the amount by which the lessor’s interest in the premises at the time the lease is granted would be increased if the work had been carried out at that time is treated as the payment of a premium. Excluded is the cost of work which, if carried out by the lessor, would be an allowable deduction in computing rent chargeable to tax under Case V of Schedule D (for example, ordinary maintenance or repairs).

(3) & (4) Also treated as the payment of a premium are —

• sums paid where the terms of a lease require that a sum be paid by the lessee in place of the whole or part of the rent,
• sums paid where under the terms of a lease a sum becomes payable as consideration for the surrender of the lease, and
• sums paid as consideration for the variation or waiver of any term of a lease.

For the purposes of determining the proportion of such sums which are to be charged as rent, the duration of the lease is to be taken as the period for which the payment is made or, in the case of a variation or waiver of the terms of a lease, the period for which such variation or waiver has effect. The liability to tax under these provisions arises for the year in which the sum is payable or, in the case of a variation or waiver of a lease, for the year in which the contract for the variation or waiver is entered into, and not, as in the case of an actual premium on a lease, the year in which the lease is granted.

Premiums to persons other than lessor

(5) Where any premium (subsection (1)) or any amount deemed (subsection (3) or (4)) to be a premium is due to a person other than the lessor (for example, a superior lessor), those subsections do not apply. Instead, the amount is treated as profits/gains of that other person and is chargeable to tax under Case IV of Schedule D. However, where the payment is in connection with the variation or waiver of the terms of a lease (subsection (4)), the charge to tax under Case IV does not arise unless that other person is connected with the lessor.

Miscellaneous

(6) Any sum other than rent paid in connection with the granting of a lease is to be treated as the payment of a premium, except where it can be shown that sufficient consideration has been given.

(7) Where, for the purposes of ascertaining the duration of a lease, a lease is looked at together with a further lease for the same premises or for premises including the whole or part of the same premises, any premium or an appropriate part of any premium paid in respect of one lease may be attributed to the other lease if this is where the premium or that part of it properly belongs.

Instalments

(8) Where a premium is payable by instalments, any tax due under this section may be paid by instalments where the taxpayer can satisfy the Revenue Commissioners that it would cause undue hardship if the payment were to be made in one sum. The tax payment may be spread over a period of up to 8 years from what would otherwise have been the due date for the payment.

Non-cash consideration

(9) The value of any non-cash consideration is also treated as a sum paid or payable.

Relevant Date: Finance Act 2019