What Is a Reverse Premium?
Cash payment from landlord to tenant (or outgoing to incoming tenant on assignment) to induce taking on a lease. Contexts: new lettings of difficult-to-let space; pre-lettings (developer pays anchor tenant to secure construction finance); assignments (outgoing tenant pays incoming to take on above-market rent or onerous obligations); surrenders (landlord pays tenant for early surrender). Distinct from rent-free period (waiver of rent obligation) — reverse premium is a cash payment.
HMRC Tax Treatment — Tenant Receives
ITTOIA 2005 ss.99-101 (individuals/partnerships) / CTA 2009 ss.96-99 (companies): reverse premium received as inducement to enter lease is taxable income — NOT capital. Spread over the lease term. CIR v Regalian Properties [1985]: property company received reverse premium to take on headlease with onerous obligations; Court of Appeal confirmed receipt was income, not capital. Assignment context: incoming tenant's receipt of reverse premium from outgoing tenant is similarly taxable income spread over unexpired term.
HMRC Tax Treatment — Landlord Pays
Landlord paying reverse premium: capital expenditure — NOT deductible against rental income in year of payment. May qualify as CGT enhancement expenditure (TCGA 1992 s.38(1)(b)) — increases base cost and reduces CGT on eventual disposal. Company landlord (CTA 2009): same analysis — capital; not deductible under property income rules. Structure carefully: rent-free periods (where landlord simply does not receive rent) may be more tax-efficient from a cash-flow perspective for the landlord.
VAT on Reverse Premiums
Pure inducement: landlord pays tenant simply to take on a lease (tenant does nothing in return) — generally no VAT; HMRC accepts no supply is made by the tenant. Supply in return: where tenant provides services (e.g., carries out fit-out works, waives existing rights) — the payment is consideration for a taxable supply; VAT applies. Marchday Group plc (1995): fit-out contribution was consideration for supply of services (fit-out works); VAT was due. Opted to tax: VAT analysis applies on top of option to tax; take specialist VAT advice before agreeing terms.
Due Diligence and Scotland
Due diligence: buyers of commercial property must require disclosure of all lease incentives (reverse premiums, rent-free periods, capital contributions) — undisclosed incentives reduce true yield. Check for clawback provisions: reverse premium may include obligation to repay if tenant assigns/surrenders within a specified period. Scotland: same ITTOIA 2005/CTA 2009 tax treatment applies to Scottish commercial tenants; LBTT position for Scottish landlords mirrors SDLT (analogous treatment). Always take specialist property law and tax advice.