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:

    Premium received * ((number of years of lease-1)*2%)

  • Income element:

    Premium received-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
Income element of premium received £4,002
Property income £27,102

Trading profit deduction for traders

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