CG70903 - Leases: property income: non-arm's length grant of lease: deemed premium

Deemed premium (no actual premium paid)

Where:

• the grant of a short lease is not at arm’s length;
• no premium is actually paid; and
• a premium is deemed to have been paid, see CG70825,

none of that deemed premium will be chargeable as income and the whole of the deemed premium will be brought into the computation of the gain arising on the grant of the lease.

Deemed Premium (premium paid is less than arm’s length premium)

Where:

• the grant of a short lease is not at arm’s length;
• a premium is paid, but it is less than would have been paid if the lease had been granted at arm’s length; and
• a further premium is deemed to have been paid, see CG70825,

only the amount of the actual premium will be taken into account in determining the amount chargeable as income, see CG70900.

Example

Mr K granted a 30 year lease of his holiday cottage to his brother. The rent payable under the lease was less than a full market rent. Mr K received a premium of £10,000. The Valuation Office Agency considered that the premium which would have been paid if the lease had been granted at arms length was £25,000.

Amount chargeable as property income

As per CG70900:

P x [ (50 - Y) / 50 }

P is the amount of the premium;

Y is the number of complete years (other than the first) in the term of the lease.

£10,000 x [ (50 - 29) / 50 ] = £10,000 x 0.42 = £4,200

Consideration for capital gains purposes

Arm’s length amount	£25,000
Less Amount chargeable as property income	£4,200
	£20,800