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EIM11446 explains how to calculate the amount to be attributed in respect of a lease premium.

The formula in Section 105A(2) ITEPA for finding the amount to be attributed to the relevant period in respect of a lease premium is:

• A/B * C where

• A is the relevant period (in days)
• B is the term of the lease (in days)
• C is the net amount payable by P in relation to the lease by way of lease premium

Example

On 1 October 2009, an employer enters into a lease of a residential property that it provides rent-free to an employee from that date. The lease is for a term of 5 years and contains no relevant break clauses. Under the lease, the employer is to pay rent of 拢120 per calendar year and a total premium of 拢150,000 in two instalments, 拢60,000 on 1 October 2009 and 拢90,000 on 1 October 2010.

2009-10

• A is 187 days (1 October 2009 to 5 April 2010)
• B is 1,826 days
• C is 拢150,000
• A/B*C = 拢15,361

The rental amount payable by P in respect of the relevant period will be 拢15,421, the sum of the rent for the period payable by P of 拢60 and the amount attributed to the period in respect of a lease premium of 拢15,361.

2010-11

• A is 365 days (6 April 2010 to 5 April 2011)
• B is 1,826 days
• C is 拢150,000
• A/B*C = 拢29,983

The rental amount payable by P in respect of the relevant period will be 拢30,103, the sum of the rent for the period payable by P of 拢120 and the amount attributed to the period in respect of a lease premium of 拢29,983.

2011-12

• A is 366 days (6 April 2011 to 5 April 2012)
• B is 1,826 days
• C is 拢150,000
• A/B*C = 拢30,065

The rental amount payable by P in respect of the relevant period will be 拢30,185, the sum of the rent for the period payable by P of 拢120 and the amount attributed to the period in respect of a lease premium of 拢30,065.

2012-13

The calculation will be the same as 2010-11 so for 2012-13 the rental amount payable by P in respect of the relevant period will be 拢30,103.

2013-14

The calculation will be the same as 2010-11 so for 2013-14 the rental amount payable by P in respect of the relevant period will be 拢30,103.

2014-15

• A is 178 days (6 April 2014 to 30 September 2014)
• B is 1,826 days
• C is 拢150,000
• A/B*C = 拢14,622

The rental amount payable by P in respect of the relevant period will be 拢14,682, the sum of the rent for the period payable by P of 拢60 and the amount attributed to the period in respect of a lease premium of 拢14,622.

Calculating the cash equivalent

As the cost of providing the accommodation exceeds 拢75,000, the cash equivalent will be calculated under Section 106 (see EIM11444).

Comment

The effect of the rules is to treat the lease premium as if it were rent paid and spread over the duration of the lease regardless of the date or dates when the premium is actually paid.