102 Deduction by reference to premium, etc paid in computation of profits for purposes of Schedule D, Cases I and II

Summary

Where income tax has been charged by virtue of section 98, 99 or 100 on a lessor in respect of a premium (or a deemed premium) paid by a lessee and the premises in question are occupied for business purposes, the lessee is treated as paying rent over the term of the lease (in addition to any actual rent) of an amount equal to the amount of the premium on which the lessor has been charged. This additional amount treated as rent is eligible for deduction as a business expense.

Details

(1) “the relevant period” is, effectively, the period over which the lessee is granted a deduction in his/her Case I or II of Schedule D tax computation for that part of the premium which the lessor, assignor or vendor is chargeable to tax. In the case of a lessor (chargeable under section 98), the relevant period is the duration of the lease. Where a lessor assigns a lease at undervalue (section 99), the relevant period is the duration of the lease remaining at the date of assignment. Where a lease is granted with a right to reconveyance or leaseback (section 100), the relevant period is the period beginning with the sale and ending on the date fixed under the terms of the sale as the date of reconveyance or leaseback or, if that date is not so fixed, ending on the earliest date that the reconveyance or leaseback could take place under the terms of the sale.

(2) Where during any part of the relevant period a lessee wholly or partly occupies leased premises for the purposes of his/her trade or profession, and the lessee has paid a premium in respect of the lease which is chargeable to tax on the lessor under subsection (1), (2), (3), (4) or (5) of section 98 or under section 99 or 100 or which would be so chargeable but for section 103(3) or any exemption from tax, the lessee is entitled, in computing his/her charge to tax under Case I or II of Schedule D, to a deduction in respect of rent, in addition to any rent actually paid, of an amount equal to the amount so chargeable on the lessor. This notional rent is deemed to accrue from day to day and, accordingly, the part of it referable to any trading period is to be determined by apportionment on a time basis for the purposes of computing the amount deductible in the Case I or II computation.

Where —

• (3) the terms of a lease requires the lessee to carry out any work on the premises and the lessor is treated as having received a premium equal in amount to the increase in value of the lessor’s interest in the property, and
• the expenditure on the work carried out qualifies for capital allowances under Part 9,

then, to avoid a double allowance, the amount of any such expenditure is to be disregarded for the purposes of this section. In other words, the lessee is not entitled to a deduction under this section in respect of that part of the premium represented by such expenditure.

(4) The relief allowed under this section is adjusted where, in a case of a sale of land with a right to reconveyance or leaseback, the liability to tax of the vendor under section 100 is adjusted in accordance with subsection (2)(b) of that section.

Relevant Date: Finance Act 2019