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S681B-S681BM Income Tax Act 2007, S849-S862 Corporation Tax Act 2010

This anti-avoidance legislation deals with the situation where the existing occupier of premises incurs additional rental liability for a comparatively short period in return for receiving a lump sum.

• In form, the lump sum is the consideration received for assigning or surrendering the lease, usually to a charity or a pension fund, and the leaseback is for a short period at an increased rent.
• In substance, however, the lump sum is a loan and the additional rent represents the repayment of principal and interest.

The legislation applies to leasebacks:

• entered into on or after 22 June 1971,
• where the unexpired term of the original lease did not exceed 50 years, and
• the leaseback is for a period of 15 years or less.

Where the legislation applies, a proportion of the lump sum is treated as income of the recipient. See BIM61345.

For example, where a lease is for 15 years, 14/15ths of the lump sum is to be treated as a capital receipt of the lessee and 1/15th as an income receipt. In the case of leases for shorter periods, the capital element is to be correspondingly smaller and the income element greater.

Example

A professional partnership:

• occupying offices under a lease which has 8 years to run,
• at a rent of 拢30,000 per annum,
• assigns the remainder of the lease to a pension fund for 拢200,000 on 1 June 2012, and
• is granted an immediate leaseback for 8 years less one day,
• for a rent of 拢70,000 per annum.

The commercial rental value of the premises on 1 June 2012 is approximately 拢100,000 per annum.

Since the rent of 拢70,000 per annum is less than the commercial rent, no restriction is required under the guidance at BIM61301 onwards.

The income proportion of the 拢200,000 is 8/15ths, that is, 拢106,666. It is treated as a receipt of the profession.

The balance of 拢93,334 is within the charge to Capital Gains Tax.