ATXP6 UK
Syllabus A1. Income tax A1a. Property and investment income

# A1a. Premiums granted for short leases

### Syllabus A1a)

Property and investment income

### How are premiums paid for short leases taxed?

#### The grant of a short lease

When a tenant takes on a new lease, he may pay a one off premium to the landlord in addition to the annual rent.

• This premium is paid to the landlord for the lease to secure the property space for a number of years by the person renting the space.

• If this lease is for less than 50 years, then it is considered to be a short lease and a part of it will be taxable in the year that it is received

• This taxable part is known as the income element of the premium.

• The part that is not taxable is known as the capital element of the premium received.

#### Calculating the income element and capital elements of the premium:

• Capital element:

• Income element:

#### Illustration:

Amanda was granted a 22 year lease of a property on 01/05/2018. She paid the landlord a premium of £6,900 and also pays rent of £2,100 per month.

• What will the property income assessable be for the landlord is 2018/19?

#### Solution:

Calculation of income element of lease that will be taxable

£6,900*((22-1)*2%) = £2,898 is the capital element of the lease

Therefore,
£6,900-£2,898 = £4,002 is the income element that will be taxed

Rent received 11 months * £2,100= £23,100
Property income £27,102

If a trader paid a premium for a short lease he may deduct the following annual amount against his trading profit in each of the year’s of the least in which the property is used in the trade.

#### This deduction per year is calculated as:

• Income element of premium / number of years of lease

This is in addition to any rent paid.

#### Illustration

Amanda is using the property for her trade.

• What will be the allowable deduction from property income in 2018/19 for Amanda?

#### Solution:

Rent paid (as shown above) £23,100
Lease payment (£4,002/22) £182
Property payments £23,282