Annex 1: Minor changes in the law made by the Act: Change 13: Deduction for tenant under taxed lease if land is outside the United Kingdom: sections 60 and 64
This change makes the relief available to tenants under taxed leases of land in the United Kingdom used in connection with a trade, profession or vocation available where the land is outside the United Kingdom.
Section 34 of ICTA provides that if a premium is, or certain other amounts are, payable in respect of a lease, the landlord is treated as receiving an amount by way of rent. If the premium or other amount is due to a person other than the landlord, generally that person is treated as receiving income in consequence of entering a transaction within Schedule A. Section 35 of ICTA treats a person who assigns at a profit a lease which has been granted at an undervalue as receiving income in consequence of entering into a transaction within Schedule A.
Section 65A(5) of ICTA provides that:
“the income from an overseas property business shall be computed for the purposes of Case V of Schedule D in accordance with the rules applicable to the computation of the profits of a Schedule A business.”
So if the lease is of land outside the United Kingdom, sections 34 and 35 of ICTA apply by virtue of section 65A(5) of ICTA. The amount which would be treated as income of a Schedule A business in the case of land in the United Kingdom is treated instead as income of an overseas property business.
Section 87(1) and (2) of ICTA provide that if land in relation to which an “amount chargeable” arose is occupied or otherwise used for the purposes of the tenant's trade, profession or vocation, the tenant is treated in computing his or her profits as paying rent in respect of the land.
Section 87(1) of ICTA defines “the amount chargeable” as:
“(a)any amount [that] falls to be treated as a receipt of a Schedule A business by virtue of section 34 or 35, or(b)any amount [that] would fall to be so treated but for the operation of section 37(2) or (3).”
Section 87(1) and (2) of ICTA are rewritten in sections 60 and 61. The “amount chargeable” on the landlord is referred to in those sections as the “taxed receipt”.
Section 65A(5) of ICTA provides that income from an overseas property business is computed for the purposes of Schedule D Case V in accordance with the rules applicable to the calculation of the profits of a Schedule A business. But section 65A of ICTA does not deem Schedule D Case V income to be income of a Schedule A business. So a receipt which falls to be taxed under Schedule D Case V by virtue of section 34 or 35 of ICTA as applied by section 65A of ICTA is not an amount which falls to be treated as “a receipt of a Schedule A business” and is not therefore within section 87(1) of ICTA.
This means that if a tenant occupies land outside the United Kingdom under a lease in respect of which the landlord has been taxed under Schedule D Case V by virtue of section 34 or 35 of ICTA as applied by section 65A(5) of ICTA, the tenant is not entitled to relief in circumstances in which he or she would have been entitled to relief under section 87(2) of ICTA if the land had been in the United Kingdom.
Section 60 applies to land wherever it is situated and to taxed receipts brought into account in calculating the profits of an overseas property business as well as a UK property business. Section 64 limits the expenses a tenant is treated as incurring under section 61 where there is a reduction under Chapter 4 of Part 3 of this Act in a receipt of an overseas property business as well as where there is a reduction in a receipt of a UK property business.
This change will result in a tenant receiving relief by reference to a taxed receipt in respect of land outside the United Kingdom in circumstances where, under the law as it applies before the commencement of this Act, there is no entitlement to relief. But this may, in certain circumstances, reduce the amount of relief subsequently available by reference to the taxed receipt under Chapter 4 of Part 3 of this Act.
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 current practice.