Taxes Consolidation Act 1997 section 98

Treatment of premiums, etc as rent

Section 98 deals with the treatment of premiums received under a short lease (a lease not longer than 50 years) as rent for tax purposes.

• When a premium is received under a short lease, part of it is treated as rent for Case V purposes, calculated by reducing the premium by 2% for each complete year of the lease term (excluding the first year), using the formula: P − (P × (N − 1) × 2%), where P is the premium and N is the number of years in the lease.
• Certain payments are deemed to be premiums, including lump sums paid in place of rent, sums paid for the surrender of a lease, sums paid for varying or waiving a lease term, and the value of any work a tenant is obliged to carry out on the premises (unless the cost of that work would be tax-deductible for the landlord).
• Where a premium or deemed premium is paid to a person other than the landlord, that person is taxed on the amount under Case IV of Schedule D rather than Case V, although for payments relating to variations or waivers, the Case IV charge only applies if the recipient is connected with the landlord.
• Any sum other than rent paid in connection with the granting of a lease is presumed to be a premium unless it can be shown that adequate consideration was given for the payment, and where premiums are payable by instalments, the tax due may be spread over up to eight years if the taxpayer would otherwise suffer undue hardship.