Annex 1: Minor changes in the law made by the Act: Change 70: Lease premiums etc: no receipt in respect of sum payable for variation or waiver of term of lease if sum due to someone other than the landlord or a person connected with landlord: section 281
This change prevents an amount being treated as a receipt of the landlord’s property business, where a sum is payable by the tenant as consideration for the variation or waiver of a term of a lease to somebody other than the landlord or a person connected with the landlord.
Section 34(5) of ICTA provides:
“Where, as a consideration for the variation or waiver of any of the terms of a lease, a sum becomes payable by the tenant otherwise than by way of rent, the lease shall be deemed for the purposes of this section to have required the payment of a premium to the landlord (in addition to any other premium) of the amount of that sum …”
The effect of this is that the landlord is treated under section 34(1) of ICTA as receiving an amount by way of rent.
Section 34(6) of ICTA provides that if a payment falling within section 34(1), (4) or (5) of ICTA is due to a person other than the landlord, no amount is to be treated as a receipt of any Schedule A business carried on by the landlord. It also provides that the other person is to be:
“taken to have received as income an amount equal to the amount which would otherwise fall to be treated as rent and to be chargeable to tax as if he had received it in consequence of having, on his own account, entered into a transaction falling to be treated as mentioned in paragraph 1(2) of Schedule A.”
The effect of this is that the other person is treated as carrying on a Schedule A business and the amount that would have been treated as rent, if the sum had been payable to the landlord, is treated as a receipt of that business.
But section 34(7) of ICTA provides that section 34(6) of ICTA shall not apply in relation to any payment within section 37(5) of ICTA unless it is due to a person who is connected with the landlord. This means that section 34(6) of ICTA does not apply to a payment falling within section 34(5) of ICTA payable to a person who is not the landlord and is not connected with the landlord.
The position for such a payment is governed by section 34(5) of ICTA. Under section 34(5) of ICTA the lease is treated for the purposes of section 34 of ICTA as requiring the payment of a premium to the landlord, regardless of the person to whom it is paid. It follows that the landlord will be treated under section 34(1) of ICTA as receiving an amount by way of rent, even if the sum is payable to somebody who is not connected with the landlord.
The intention appears to be that in such a case nobody should be treated as receiving an amount by way of rent or income. This is how section 34(6) of ICTA is operated in practice. So section 281(1)(b) requires that in order for section 281 to apply the sum payable as consideration for the variation or waiver of a term of a lease must be due to the landlord or a person connected with the landlord.
If, as a result of this change, no amount is brought into account as a receipt in calculating the profits of the landlord’s property business in respect of a sum payable by a tenant as consideration for the variation or waiver of the terms of a lease to a person other than the landlord, or a person connected with the landlord, the tenant will not be entitled to any 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.
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.