98A Taxation of reverse premiums

Summary

This section clarifies the taxation of reverse premiums. Generally, a reverse premium is a payment or benefit received by a person as an inducement to enter into a lease as a lessee.

Firstly, a reverse premium is treated as a revenue receipt. A reverse premium will be assessable as rent unless it is to be assessed as a receipt of a trade or profession or it is to be deducted from the amount treated as expenses of management of a life assurance company which is not charged to tax under Case I of Schedule D.

Secondly, a reverse premium is charged in the first relevant chargeable period where two or more of the persons who enter into the lease and the accompanying arrangements are connected and the terms of those arrangements are not what would be expected if those persons were dealing at arm’s length. Where an assurance company, which is not charged to tax under Case I of Schedule D, is involved, a reverse premium reduces the expenses of management of the company for the chargeable period in which the premium is received. Otherwise a reverse premium is charged in accordance with the accepted principles of commercial accounting.

Finally, there are a number of situations outlined where these provisions do not apply to a payment or benefit received.

The section applies from 7 June 2001 in respect of reverse premiums received on or after that date.

Details

Definitions

(1) “chargeable period” means an accounting period of a company or a year of assessment;

“first relevant chargeable period” means the chargeable period in which a relevant transaction is entered into or, if a relevant transaction is entered into, by a person who receives a reverse premium for the purposes of a trade or profession which that person is about to carry on, then the first relevant chargeable period is the chargeable period in which the person commences to carry on the trade or profession;

“relevant arrangements” means a relevant transaction and any arrangements entered into in connection with it, whether before, at the same time or after it;

“relevant transaction” means a transaction under which a person is granted an estate or interest in, or a right in or over, land;

“reverse premium” means a payment or other benefit received by a person by way of inducement in connection with a relevant transaction being entered by that person or by a person connected with that person;

“sale and lease-back arrangement” means an arrangement under which a person disposes of the full estate or interest held by that person in land to another person and the terms subject to which the disposal is made provide for the grant of a lease of an interest in, or a right in or over, the land concerned to the person who is making the disposal, by the person who is making the acquisition.

(1)(b) For the purposes of the section, persons are connected with each other if they are connected, within the meaning of section 10 at any time during the chargeable period or periods when the relevant arrangements are entered into.

Tax treatment of reverse premiums

(2) A reverse premium is regarded as a receipt of a revenue nature for the purposes of the Tax Acts.

(3) The amount or value of a reverse premium is to be treated as if it were an amount of rent. This provision is subject to the provisions of subsections (4) and (6).

(4) Where a relevant transaction is entered into by a person who receives a reverse premium and for the purposes of a trade or profession which that person carries on or is about to carry on, then the amount or value of the reverse premium is treated as if it were a receipt of that trade or profession, when computing the profits of the trade or profession under Case I or II of Schedule D.

Connected persons

(5) The whole amount or value of a reverse premium is treated as arising in the first relevant chargeable period for the purposes of treating a reverse premium as rent under subsection (3) or as a receipt of a trade or profession under subsection (4), where:

• two or more of the persons who enter into relevant arrangements are connected, and
• the terms of those arrangements are not what would reasonably have been expected if those persons were dealing at arm’s length.

Assurance company carrying on life business

(6) A reverse premium will reduce the expenses of management of an assurance company carrying on life business, in respect of which it is not charged to tax under Case I of Schedule D, for the chargeable period in which the premium is received. “Assurance company” and “life business” have the same meanings as in section 706.

Exclusions

(7) The section does not apply to a payment or benefit:

• received by an individual in connection with the grant of an estate or interest in, or a right in or over premises occupied or to be occupied by that individual as his or her only or main residence,
• to the extent that it is consideration in relation to the sale of land which constitutes the sale in a sale and lease-back arrangement, provided that the terms of that arrangement at the time the arrangement is entered into are on bona fide commercial terms, or
• to the extent that, apart from this section, it is taken into account as a receipt in computing the profits or gains of a trade or profession under Case I or II of Schedule D.

Relevant Date: Finance Act 2019