The Income Tax Relief Fraction — ITTOIA 2005 ss.276–282
Where a landlord receives a premium for granting a lease of 50 years or less, a proportion is taxed as income. Formula: Income element = Premium × (50 − (n−1)) / 50, where n = lease term in years. The remainder is a capital receipt (potentially subject to CGT). For leases over 50 years, the entire premium is capital.
SDLT on Lease Premiums
SDLT is payable by the tenant on the premium at residential or non-residential rates. For commercial leases, SDLT is also payable on the Net Present Value (NPV) of the rent (1% on NPV above £150,000). Premium SDLT and rent SDLT are calculated separately. The tenant can deduct the income element of the premium from their income tax, spread over the lease term (ITTOIA 2005 s.60).
Premiums on Assignment and Reverse Premiums
A premium on the assignment of an existing lease is treated in full as a capital receipt — the ITTOIA income element formula does not apply. A reverse premium (payment by landlord to tenant) is taxable as income on the tenant; for the landlord, it is capital expenditure (enhancement expenditure increasing the CGT base cost).
Planning — Premium vs Rent Trade-Offs
Leases of 50+ years produce an entirely capital premium. The rent vs premium SDLT trade-off depends on NPV calculations and applicable rates. Where the landlord has opted to tax for VAT, the premium is also subject to 20% VAT. The capital element of the premium is a part disposal of the landlord's property interest for CGT.