103 Deduction by reference to premiums, etc paid in computation of profits for purposes of this Chapter

Summary

Where a lessee sub-lets premises under a short lease (that is, a lease not exceeding 50 years) and he/she has paid a premium, he/she is entitled in computing Schedule D Case V income to a deduction representing part of that premium. The amount of the deduction is calculated by reference to the amount of the premium (if any) received under the sub-lease or the amount of the rent charged under the sub-lease.

Details

(1) “the relevant period” is, effectively, the period over which the lessee is granted a deduction in his/her Case V of Schedule D tax computation for that part of the premium which the lessor, assignor or vendor is chargeable to tax. The amount of the deduction is spread over the duration of the relevant period. 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 a person obtains a lease of, or other interest in, premises for a premium or other sum in respect of which the recipient (that is, the lessor) has become chargeable to tax under subsection (1), (2), (3), (4) or (5) of section 98, or under section 99 or 100, and that person then sub-lets the premises, that person is entitled, in computing the profits from the sub-letting, to be treated as having paid rent (in addition to any actual rent paid) for the duration of the period for which that person has obtained the superior lease, or other interest. The amount to be treated as rent for this purpose is an amount which bears the same proportion to the amount charged under section 98, 99 or 100 as the period for which the person has obtained the superior lease bears to the relevant period. The effect of this is to give the person a deduction in respect of this notional rent under section 97(2) in computing his/her Case V income from any sub-lease. The notional rent is deemed to accrue from day to day and, accordingly, the part of it referable to any period is determined by apportionment on a time basis for the purposes of calculating the amount deductible in the Case V computation for that period.

(3) & (5) The section also caters for the situation where the intermediate landlord becomes chargeable under subsection (1), (2), (3), (4) or (5) of section 98 or under section 99 or 100 by reason, for example, of having obtained a premium on the grant of a sub-lease. Where this happens, the charge on the intermediate landlord in respect of the premium is the amount represented by the excess of the amount so chargeable over the appropriate fraction of the amount of any premium, etc charged on the superior landlord. The appropriate fraction of the premium charged on the superior landlord is a sum which bears the same proportion to that amount as the duration of the sub-lease bears to the duration of the superior lease.

Where a part only of the premises is sub-let, the amount on which the person is chargeable is the excess of the premium over so much of the appropriate fraction of the premium of the superior landlord as is attributable to that part of the premises.

(4) & (5) Where relief is given under subsection (3), only so much (if any) of the amount of the premium paid to the superior landlord as remains unrelieved is to qualify for relief under subsection (2). In the example cited B would not be entitled to any relief under subsection (2) during the currency of the sub-lease. Where part only of the premises covered by the superior lease is included in the sub-letting, appropriate apportionments are to be made.

(6) Where —

• the terms of the superior 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.

(7) 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