Revenue Note for Guidance

99 Charge on assignment of lease granted at undervalue

Summary

Where a short lease (that is, a lease which does not exceed 50 years) is granted at undervalue, a charge to tax under Case IV of Schedule D arises on any subsequent assignment of the lease. A lease is treated as having been granted at undervalue if, having regard to values prevailing at the time it was granted, it could have required a higher premium than the premium (if any) obtained at that time. In determining the amount that could have been obtained, it must be assumed that the negotiations for the lease were at arm’s length.

Details

(1) Where a short lease is granted at undervalue and the lease is subsequently assigned, tax is charged by reference to the amount by which the consideration paid for the assignment exceeds the original premium (if any) for the lease. On the next assignment of the lease, tax is charged by reference to the amount by which the consideration for that assignment exceeds the consideration for the previous assignment of the lease and so on in respect of each such assignment. Where the consideration paid for the first assignment does not exceed the original premium, or where the consideration paid for a second or subsequent assignment does not exceed the consideration for the previous assignment, no charge arises on the assignment.

In the case of each assignment, tax is assessed on the assignor on the amount which would have been assessed under section 98(1) had the excess payment been a premium or an additional premium for the grant of the lease (that is, it is to be written down at 2 per cent for each year of the original duration of the lease except the first).

Where the aggregate excess amounts taken into account equal the amount foregone on the original grant of the lease, that is, the premium which the lessor could have obtained on the original grant of the lease (or, where the original lease was granted at a premium, the additional premium which could have been obtained), no further liability arises.

Example

A grants to B for €50,000 a 21 year lease at a nominal rent. The lease in reality is worth €1,000,000. A is taxable under section 98(1) on €30,000 (€50,000 reduced by 40%). B then assigns the lease to C for €500,000. B is chargeable under section 99 on €270,000 (€500,000 less €50,000 reduced by 40%). C then assigns the lease to D for €450,000. This transaction is left out of account as the consideration does not exceed the consideration on the previous assignment. D then assigns the lease to E for €1,400,000. The excess is €950,000 but D is chargeable under this section as follows —

	€
Value of lease at time of grant	1,000,000
Premium actually paid	50,000
Excess of value over premium (the amount foregone)	950,000
Less excess of B’s assignment to C over original premium	450,000
Balance of amount foregone	500,000
Less 40%	200,000
Amount chargeable	300,000

(2) In computing the profits of a dealer in land, any trading receipts which are chargeable under this section are excluded.

Relevant Date: Finance Act 2019