Annex 1: Minor changes in the law made by the Act: Change 68: Sums payable instead of rent, or as consideration for the variation or waiver of a term of a lease, for periods of 50 years or less: sections 276, 279 and 281
This change clarifies the application of the lease premium rules to sums paid instead of rent, or for the variation or waiver of a term of a lease, if the period for which the sum is paid, or the variation or waiver has effect, is 50 years or less but the duration of the lease is more than 50 years.
Section 279 is based on section 34(4) of ICTA. If under the terms of a lease a tenant is to pay a sum instead of rent, section 34(4) of ICTA treats the lease as requiring the payment of a premium for the purposes of section 34 of ICTA.
Section 34(4) of ICTA is intended to prevent a landlord avoiding a charge to income tax on rent by including in the terms of a lease provision for a lump sum to be paid instead of rent.
Section 34(1) of ICTA applies only if the duration of the lease does not exceed 50 years. Section 34(4) of ICTA does not say explicitly that it applies to leases not exceeding 50 years or that it applies irrespective of the duration of the lease. But section 34(4)(a) of ICTA provides that, in computing the profits of the Schedule A business of which section 34(4) of ICTA treats the sum payable instead of rent as a receipt, any period other than that in relation to which the sum is paid should be disregarded in arriving at the duration of the lease.
There is more than one way to interpret the relationship between section 34(4)(a) of ICTA and the restriction in section 34(1) of ICTA that the duration of the lease should not exceed 50 years.
Section 34(1) of ICTA could be interpreted as limiting the application of section 34(4) of ICTA to leases with a duration of not more than 50 years. This would allow a landlord to avoid income tax on rent for any period up to 50 years by receiving that rent in the form of a lump sum if it is in respect of a lease for more than 50 years.
This is not the way the legislation has been interpreted and applied in practice over many years. Ever since the legislation was first enacted in FA 1963 the Inland Revenue has interpreted section 34(4) of ICTA as applying to the receipt of a sum instead of rent for a period not exceeding 50 years regardless of the duration of the lease. As a result, the person by whom the sum is paid may be treated as paying rent for the purposes of relief under section 37(4) of ICTA in computing the profits of a Schedule A business or under section 87 of ICTA in computing the profits of a trade, profession or vocation.
Section 279(1)(b) follows the Inland Revenue interpretation by applying section 279 if a sum is paid instead of rent for a period of 50 years or less regardless of the duration of the lease. Because this is not explicit in section 34(4) of ICTA it may be a change in the law.
A similar point arises on section 281, based on section 34(5) of ICTA. If a tenant is to pay a sum as consideration for the variation or waiver of any of the terms of a lease, section 34(5) of ICTA treats the lease as requiring the payment of a premium.
Section 34(5) of ICTA is intended to prevent a landlord avoiding a charge to income tax on rent, or on a premium treated as rent under section 34(1) of ICTA, by altering the terms of a lease in return for the payment of a lump sum. For example, a lease on a shop might contain a condition that the property is not to be used for retail trade; the landlord then waives this condition in return for a separate consideration. Without section 34(5) of ICTA, the additional consideration would not be a premium for the purposes of section 34 of ICTA.
As in section 34(4) of ICTA, section 34(5) of ICTA does not say explicitly that it applies to leases not exceeding 50 years or that it applies irrespective of the duration of the lease. But section 34(5)(a) of ICTA provides that in computing the profits of the Schedule A business of which section 34(5) of ICTA treats the sum payable as consideration as a receipt, any period other than that for which the variation or waiver has effect should be disregarded in arriving at the duration of the lease.
As in section 34(4) of ICTA, there is more than one way to interpret the relationship between section 34(5)(a) of ICTA and the restriction in section 34(1) of ICTA that the duration of the lease should not exceed 50 years.
Section 34(1) of ICTA could be interpreted as limiting the application of section 34(5) of ICTA to leases with a duration of not more than 50 years. This would allow a landlord to avoid income tax on rent for any period up to 50 years by receiving a payment for the waiver or variation of the term of a lease if it is in respect of a lease for more than 50 years.
As in the case of section 34(4)(a) of ICTA, this is not the way the legislation has been interpreted and applied in practice. Ever since the legislation was first enacted in FA 1963 the Inland Revenue has interpreted section 34(5) of ICTA as applying to the receipt of a sum as consideration for the variation or waiver of a term of a lease for a period not exceeding 50 years regardless of the duration of the lease. As a result, the person by whom the sum is paid may be treated as paying rent for the purposes of relief under section 37(4) or section 87 of ICTA.
Section 281(1)(c) follows the Inland Revenue interpretation by applying section 281 if a sum is paid for the waiver or variation of the term of a lease for a period of 50 years or less regardless of the duration of the lease. Because this is not explicit in section 34(5) of ICTA, it may be a change in the law.
If, as a result of this change, an amount is brought into account as a receipt in respect of a sum payable under the terms of a lease instead of rent, or as consideration for the variation or waiver of a term of a lease, the tenant may become entitled to relief under sections 287 to 295 if the tenant carries on a property business or under sections 60 to 65 if he or she carries on a trade, profession or vocation.
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.