Annex 1: Minor Changes in the Law Change 50: Property income: lease premiums etc: rules for determining effective duration of lease: section 243 and Schedule 1
This change makes some minor adjustments to the rules for determining the effective duration of a lease.
Section 38(1) of ICTA provides:
Rule 1 in section 303(1) of ITTOIA is in similar terms.
Section 38(1)(a) of ICTA and rule 1 in section 303(1) of ITTOIA do not prevent the lease being treated as expiring before the date on which it is thought likely that the lease will in fact end. But it is difficult to see what justification there could be for treating a lease as ending before that date.
Accordingly, rule 1 in section 243(1) requires the lease to be treated as ending on the date beyond which it is unlikely that the lease will continue. It will no longer be possible to contend that the lease should be treated as ending before that date. Schedule 1 amends rule 1 in section 303(1) of ITTOIA in line with rule 1 in section 243(1).
Section 38(1)(a) of ICTA and rule 1 in section 303(1) of ITTOIA will give a date falling before the expiry of the lease in question only if:
	the premium was not substantially greater than it would have been … had the term been one expiring on that date.
Section 34(2), (4) and (5) of ICTA deems, in certain cases, amounts to be premiums for the purposes of section 34 of ICTA.
Section 278 of ITTOIA deems, in certain circumstances, an amount to be a premium for the purposes of section 277 of ITTOIA. Sections 279 to 281 of ITTOIA provide, in certain cases, for amounts to be taken into account in a way that is similar to section 277 of ITTOIA’s treatment of premiums (but without deeming those amounts to be premiums).
It has been HMRC practice to treat sums deemed to be premiums in section 34 of ICTA as if they were also premiums for the purposes of considering under section 38(1)(a)(ii) of ICTA whether the premium was not substantially greater than it would have been had the term been one expiring on the date in question.
Section 243(3) reflects this practice by providing that “premium” in rule 1 includes such deemed sums. Schedule 1 inserts section 303(2A) of ITTOIA containing a corresponding definition of “premium” for the purposes of rule 1 in section 303(1) of ITTOIA.
This makes rule 1 in section 243(1) and in section 303(1) of ITTOIA less likely to apply because the (larger) premium is less likely to be “not substantially greater” than the premium expected had the term been one expiring on the date in question.
In some cases the question of whether or not there is a property business receipt and, if so, how much depends on the effective duration of the lease. If, as a result of this change, the effective duration of a lease is made longer, a landlord may have a smaller property business receipt than would otherwise have been the case and a tenant may correspondingly be entitled to less relief.
This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.