House of Commons - Explanatory Note
Income Tax (Trading and Other Income) Bill - continued          House of Commons

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Clause 278: Amount treated as lease premium where work required

1125.     This clause is based on section 34(2) and (3) of ICTA.

Clause 279: Sums payable instead of rent

1126.     This clause deals with cases where a payment is made instead of rent for some or all of the duration of a lease. It is based on sections 34(1), (4), (6) and (7A) and 37(2) of ICTA.

1127.     Section 34(1) of ICTA applies if the duration of the lease is not more than 50 years. But section 34(4)(a) of ICTA provides that any period other than that in relation to which the sum is payable in lieu of rent must be ignored in arriving at the duration of the lease. So for the purposes of section 34(4) of ICTA the duration of a lease cannot be longer than the period in respect of which the sum is payable instead of rent. Subsection (1) makes clear that -irrespective of the length of the lease - the payment of a sum instead of rent for a period of not more than 50 years is within the scope of this clause. See Change 68 in Annex 1.

1128.     Subsections (2) to (4) of this clause are drafted on the same basis as subsections (2) to (4) of clause 277.

1129.     Subsection (2) treats a person to whom a sum is due instead of rent as entering into a transaction mentioned in clause 264 (if the land to which the lease relates is in the United Kingdom) or clause 265 (if the land to which the lease relates is outside the United Kingdom). The effect of clauses 264 and 265 is that the transaction will be included in, or will constitute, the person's UK or overseas property business.

1130.     Section 34(1) of ICTA treats income in the hands of a landlord as received when the lease is granted. There is no corresponding rule for non-landlords in section 34(6) of ICTA. This clause instead requires the person carrying on the property business (whether or not that person is the landlord) to bring an amount into account in calculating the profits of that business for the tax year in which the sum instead of rent is payable. See Change 69 in Annex 1.

1131.     The formula in section 34(1) of ICTA calculates the amount treated as received by way of rent by reference to the duration of the lease. Section 34(4)(a) of ICTA says that in computing the profits of the business any period other than that in respect of which the sum is paid instead of rent must be ignored. So in calculating the amount to be treated as rent in respect of a sum within section 34(4) of ICTA, the duration of the lease for the purposes of the formula in section 34(1) of ICTA must be adjusted in accordance with section 34(4)(a) of ICTA.

1132.     Subsection (6) combines the requirements at sections 34(1) and (4)(a) of ICTA so that the period used in the formula in subsection (5) is the shorter of the period for which the payment is made and the period from the beginning of that period to the end of the effective duration of the lease.

Clause 280: Sums payable for surrender of lease

1133.     This clause deals with cases where a sum is payable for the surrender of a lease. It is based on sections 34(1), (4), (6) and (7A) and 37(2) of ICTA.

1134.     Subsections (2) to (4) of this clause are drafted on the same basis as subsections (2) to (4) of clause 277.

1135.     Subsection (2) treats a person to whom a sum is due as consideration for the surrender of the lease as entering into a transaction mentioned in clause 264 (if the land to which the lease relates is in the United Kingdom) or clause 265 (if the land to which the lease relates is outside the United Kingdom). The effect of clauses 264 and 265 is that the transaction will be included in, or will constitute, the person's UK or overseas property business.

1136.     Section 34(1) of ICTA treats income in the hands of a landlord as received when the lease is granted. There is no corresponding rule for non-landlords in section 34(6) of ICTA. This clause instead requires the person carrying on the property business (whether or not that person is the landlord) to bring an amount into account in calculating the profits of that business for the tax year in which the sum for the surrender of the lease is payable. See Change 69 in Annex 1.

Clause 281: Sums payable for variation or waiver of term of lease

1137.     This clause deals with the case where a payment is made for the variation or waiver of any of the terms of a lease. It is based on section 34(1), (5), (6), (7) and (7A) of ICTA.

1138.     Section 34(1) of ICTA applies if the duration of the lease is not more than 50 years. Section 34(5)(a) of ICTA provides that any period before or after the period for which the variation or waiver has effect must be ignored in arriving at the duration of the lease. So for the purposes of section 34(4) of ICTA, the duration of a lease cannot be longer than the period for which the variation or waiver has effect. Subsection (1) makes clear that - irrespective of the length of the lease - the payment of a sum as consideration for the variation or waiver of the terms of a lease for a period of not more than 50 years is within the scope of this clause. See Change 68 in Annex 1.

1139.     Section 34(6) of ICTA says that sums due to a person other than a landlord under:

  • section 34(1) of ICTA (premiums);

  • section 34(4) of ICTA (sums payable instead of rent or for the surrender of a lease); and

  • section 34(5) of ICTA (sums payable for the variation or waiver of the terms of a lease),

are charged on that person.

1140.     Section 34(7) of ICTA disapplies section 34(6) of ICTA if the payment is due to a person not connected with the landlord. But section 34(7) of ICTA does not explicitly set aside the requirement in section 34(5) of ICTA to treat sums payable for the variation or waiver of the terms of a lease as the payment of a premium to the landlord if that payment is made to a person unconnected with the landlord. So it is not clear whether section 34(6) of ICTA catches a person unconnected with the landlord who receives a consideration in connection with the variation or waiver of the terms of a lease (eg a person living above a shop who receives a payment in consideration of the landlord waiving a term in the shop lease which restricts the hours during which the shop may open).

1141.     Subsection (1) deals with this by providing that this clause applies only if the sum is due to the landlord or a connected person. "Connected person" is defined in section 839 of ICTA (see clause 878(5)). See Change 70 in Annex 1.

1142.     Subsections (2) to (4) of this clause are drafted on the same basis as subsections (2) to (4) of clause 277.

1143.     Subsection (2) treats a person to whom a sum is due as consideration for the variation or waiver of the terms of a lease as entering into a transaction mentioned in clause 264 (if the land to which the lease relates is in the United Kingdom) or clause 265 (if the land to which the lease relates is outside the United Kingdom). The effect of clauses 264 and 265 is that the transaction will be included in, or will constitute, the person's UK or overseas property business.

1144.     Section 34(1) of ICTA treats income in the hands of a landlord as received when the lease is granted. There is no corresponding rule for non-landlords in section 34(6) of ICTA. This clause instead requires a person carrying on the property business (whether or not that person is the landlord) to bring an amount into account in calculating the profits of that business for the tax year in which the sum is payable. See Change 69 in Annex 1.

1145.     Section 37(2) of ICTA provides for the reduction of amounts treated as rent under section 34 or 35 of ICTA which arise in respect of the "grant or disposition" of a lease. It is arguable that section 37(2) of ICTA does not apply to an amount treated as income under section 34(5) of ICTA in respect of a sum payable for the variation or waiver of the terms of a lease because the amount does not arise in respect of the grant or disposition of a lease.

1146.     Clause 287(1) extends relief under clause 288 to receipts in respect of sums payable for variation or waiver. This is reflected in subsection (5) of this clause. See Change 71 in Annex 1.

1147.     The formula in section 34(1) of ICTA calculates the amount treated as received by way of rent by reference to the duration of the lease. Section 34(5)(a) of ICTA says that in computing the profits of the business any period other than that in relation to which the variation or waiver has effect must be ignored. So in calculating the amount to be treated as rent in respect of a sum within section 34(5) of ICTA, the duration of the lease for the purposes of the formula in section 34(1) of ICTA must be adjusted in accordance with section 34(5)(a) of ICTA.

1148.     Subsection (6) combines the requirements in section 34(1) and (5)(a) of ICTA so that the period used in the calculation is the shorter of the period for which the variation or waiver has effect and the period from the beginning of that period to the end of the effective duration of the lease.

Clause 282: Assignments for profit of lease granted at undervalue

1149.     This clause treats a person who assigns, at a profit, a lease granted to him or her at less than its true value as receiving an amount calculated by reference to the smaller of the discount at which the lease was granted and the profit on the assignment. It is based on sections 35(1), (2) and (2A) and 37(2) of ICTA.

1150.     Subsections (2) to (4) of this clause are drafted on the same basis as subsections (2) to (4) of clause 277.

1151.     Subsection (2) treats a person who assigns the lease at undervalue as entering into a transaction mentioned in clause 264 (if the land to which the lease relates is in the United Kingdom) or clause 265 (if the land to which the lease relates is outside the United Kingdom). The effect of clauses 264 and 265 is that the transaction will be included in, or will constitute, the person's UK or overseas property business.

1152.     Section 35(2A) of ICTA treats income deemed to have been received under section 35 of ICTA as received when the consideration for the assignment of the lease becomes payable. This clause instead brings an amount into account as a receipt in calculating the profits of the property business for the tax year in which the consideration for the assignment is payable. See Change 69 in Annex 1.

1153.     The formula in subsection (4) for calculating the deemed receipt if there is an assignment at a profit is based on section 35(2) of ICTA (which refers back to the formula in section 34(1) of ICTA).

Clause 283: Provisions supplementary to section 282

1154.     This clause is based on section 35(1) and (2) of ICTA.

Clause 284: Sales with right to reconveyance

1155.     This clause brings a deemed receipt into account if property is sold on terms which provide for the property to be reconveyed to the seller, or to a connected person, at less than the sale price. It is based on section 36(1) and (4A) of ICTA.

1156.     "Connected person" is defined in section 839 of ICTA (see clause 878(5)).

1157.     Section 36(1) of ICTA does not specify any limit on the time between sale and reconveyance. But because section 36(1) of ICTA reduces the amount of the deemed income by 1/50th for each complete year between sale and reconveyance, no charge arises if the property is reconveyed more than 51 years after the sale. So this clause applies only if the period between sale and reconveyance is not more than 50 years. See Change 72 in Annex 1.

1158.     Subsections (2) to (4) of this clause are drafted on the same basis as subsections (2) to (4) of clause 277.

1159.     Subsection (2) treats the person who sells the land as entering into a transaction mentioned in clause 264 (if the land to which the lease relates is in the United Kingdom) or clause 265 (if the land to which the lease relates is outside the United Kingdom). The effect of clauses 264 and 265 is that the transaction will be included in, or will constitute, the person's UK or overseas property business.

1160.     Section 36(4A) of ICTA treats income deemed to have been received under section 36 of ICTA as received when the property is sold. This clause instead brings an amount into account as a receipt in calculating in calculating the profits of the property business for the tax year in which the property is sold. See Change 69 in Annex 1.

1161.     The formula in subsection (4) is based on section 36(1) of ICTA. Section 36(1) of ICTA deems the person by whom the property is sold to receive an amount equal to the excess, if any, of the sale price over the price at which the property is to be reconveyed or, if the earliest date on which the property can be reconveyed is two or more years after the sale, the excess reduced by 1/50th for each complete year between the sale and that date.

1162.     If a property is reconveyed within two years of sale, the amount given by the formula in subsection (4) is equal to the excess of the sale price over the price at which the property is reconveyed. So it is not necessary to prescribe different rules for properties reconveyed before and after the two year period.

Clause 285: Sale and leaseback transactions

1163.     This clause brings a deemed receipt into account if property is sold on terms which provide for the grant of a lease to the seller, or to a connected person, at less than the sum of any premium for the lease and the value on the date of sale of the right to lease back the property. It is based on section 36(1), (3), (4) and (4A) of ICTA.

1164.     "Connected person" is defined in section 839 of ICTA (see clause 878(5)).

1165.     Section 36(1) of ICTA does not specify any limit on the time between sale and leaseback. But because section 36(1) of ICTA reduces the amount of the deemed income by 1/50th for each complete year between sale and leaseback, no charge arises if the property is leased back more than 51 years after the sale. So this clause applies only if the period between sale and leaseback is not more than 50 years. See Change 72 in Annex 1.

1166.     Subsections (3) to (5) of this clause are drafted on the same basis as subsections (2) to (4) of clause 277.

1167.     Subsection (3) treats the person who sells the land as entering into a transaction mentioned in clause 264 (if the land to which the lease relates is in the United Kingdom) or clause 265 (if the land to which the lease relates is outside the United Kingdom). The effect of clauses 264 and 265 is that the transaction will be included in, or will constitute, the person's UK or overseas property business.

1168.     Section 36(4A) of ICTA treats income deemed to have been received under section 36 of ICTA as received when the property is sold. This clause instead brings an amount into account as a receipt in calculating the profits of the property business for the tax year in which property is sold. See Change 69 in Annex 1.

1169.     The formula in subsection (5) is based on section 36(1) and (3) of ICTA. Section 36(1) of ICTA, as adapted by section 36(3) of ICTA, deems the person by whom the property is sold to receive an amount equal to the excess, if any, of the sale price over the sum of any premium for the lease and the value on the date of sale of the right to lease back the property or, if the earliest date on which the property can be leased back is two or more years after the sale, the excess reduced by 1/50th for each complete year between the sale and that date.

1170.     If a property is leased back within two years of sale, the amount given by the formula in subsection (5) is equal to the excess of the sale price over the sum of any premium for the lease and the value on the date of sale of the right to lease back the property. So it is not necessary to prescribe different rules for calculating the amount of the receipt for properties leased back before and after the two year period.

Clause 286: Provisions supplementary to sections 284 and 285

1171.     This clause is based on section 36(2)(a), (3) and (4B) of ICTA.

Clause 287: Circumstances in which additional calculation rule applies

1172.     This clause and the next eight clauses (all based on section 37 of ICTA) contain special rules giving a tenant relief by reference to the amount of a premium or other sum brought into account as a receipt in calculating the profits of a property business of his or her landlord under clause 277 or clauses 279 to 282:

  • clauses 287 to 290 provide for the amount of a premium or other sum brought into account as a receipt in the hands of a tenant who is also a landlord to be reduced if the tenant's own landlord has received a premium or other amount within clause 277 or clauses 279 to 282 in respect of the same property;

  • clauses 291 to 294 allow a tenant under a lease in respect of which the landlord has received a premium or other amount within clause 277 or clauses 279 to 282 a deduction in calculating the profits of any property business carried on by the tenant; and

  • clause 295 caps the total relief which can be given by reference to a premium or other sum brought into account in calculating the profits of a property business under clause 277 or clauses 279 to 282 to the amount of that receipt.

1173.     Clause 287 is based on section 37(1), (2), (3) and (9) of ICTA.

1174.     Section 37(2) of ICTA provides for the reduction of amounts treated as rent under section 34 or 35 of ICTA which arise in respect of the "grant or disposition" of a lease. But section 37(2) does not provide for the reduction of an amount in respect of a sum paid under section 34(5) for the variation or waiver of the terms of a lease because a variation or waiver is not in respect of the grant or disposition of a lease. This clause extends relief to payments for variation or waiver. See Change 71 in Annex 1.

1175.     The definitions of "taxed lease" and "taxed receipt" in subsection (4) are based on the definitions of "head lease" and "amount chargeable on the superior interest" in section 37(1) of ICTA.

1176.     Section 37(9) of ICTA contains the following prohibition against excess relief:

An amount or part of an amount shall not be deducted under this section more than once from any sum, or from more than one sum, and shall not in any case be so deducted if it has been otherwise allowed as a deduction in computing the income of any person for tax purposes.

1177.     But section 37 of ICTA does not give rules for calculating deductions if there is more than one premium under section 34 of ICTA, or more than one amount treated as a premium under section 35 of ICTA, and gives taxpayers no guidance as to how deductions under section 37 of ICTA are to be calculated in order not to breach the limit in section 37(9) of ICTA.

1178.     Subsection (5) stipulates that for clause 288 to apply there must be at least one taxed receipt with an "unused amount". See Change 73 in Annex 1.

1179.     Amounts within clause 278 (amount treated as lease premium where work required) are not specified separately in this clause, or in clause 288, because clause 278(2) treats such amounts as premiums within clause 277.

Clause 288: The additional calculation rule

1180.     This clause provides for the amount of a receipt calculated under clause 277 or clauses 279 to 282 to be reduced if there is an earlier taxed receipt in relation to the same property. It is based on section 37(2), (3), (7) and (9) of ICTA.

1181.     The amount to be reduced is referred to in this clause, and in clause 289, as "the receipt under calculation".

1182.     Section 37(2) of ICTA provides for the reduction of amounts treated as rent under section 34 or 35 of ICTA which arise in respect of the "grant or disposition" of a lease. But section 37(2) of ICTA does not provide for the reduction of an amount in respect of a sum paid under section 34(5) of ICTA for the variation or waiver of the terms of a lease because a variation or waiver is not in respect of the grant or disposition of a lease.

1183.     Clause 287 extends relief to payments for variation or waiver. This is reflected in the reference to section 281 in subsection (2) of this clause. See Change 71 in Annex 1.

1184.     This clause introduces the label "basic relieving amount" for the amount by which the receipt under calculation is to be reduced.

1185.     Subsection (3) requires the basic relieving amount to be restricted under clause 289(5) so that it does not exceed the amount of the receipt under calculation. This means that if the basic relieving amount exceeds the amount of the later taxed receipt, the excess is not available to offset against other receipts. See Change 73 in Annex 1.

1186.     If there is more than one taxed receipt by reference to which the receipt under calculation may be reduced, it is for the person entitled to the relief to decide the order in which relief is to be taken by reference to those receipts. And where a basic relieving amount has been calculated by reference to more than one taxed receipt, subsection (3) provides for the total of the basic relieving amounts to be restricted under clause 289(5) .

1187.     The use of the "unreduced amount" of the taxed receipt (defined in clause 290(2)) in the formula in subsection (4) makes clear that the basic relieving amount by reference to a taxed receipt is to be calculated according to the amount of that receipt before any reductions or deductions.

1188.     The definition of "receipt period" in relation to a receipt under clause 277 and clauses 279 to 282 in subsection (6) is based on the definition of "the period in respect of which an amount arose" in section 37(7)(b) of ICTA.

Clause 289: The additional calculation rule: special cases

1189.     This clause modifies the rule in clause 288 for cases within clauses 277 to 281 if a sub-lease is granted in respect of part only of the premises subject to the taxed lease. It is based on section 37(2), (3) and (9) of ICTA.

1190.     Section 37(2) of ICTA provides for the reduction of amounts treated as rent under section 34 or 35 of ICTA which arise in respect of the "grant or disposition" of a lease. But section 37(2) of ICTA does not provide for the reduction of an amount in respect of a sum paid under section 34(5) of ICTA for the variation or waiver of the terms of a lease because a variation or waiver is not in respect of the grant or disposition of a lease.

1191.     Clause 287 extends relief to amounts brought into account in respect of sums payable for the variation or waiver of the terms of a lease. This is reflected in the reference in subsection (2) of this clause to the receipt under calculation "under any of sections 277 to 281". See Change 71 in Annex 1.

1192.     But this clause does not apply to receipts under section 282 (assignments for profit of lease granted at undervalue) because it is not possible for a lease to be assigned other than in respect of the whole of the premises subject to the lease.

1193.     Section 37(3) of ICTA requires a "just apportionment" of the amount chargeable on the superior interest to be made if the whole of the premises are not subject to the lease. This clause instead requires the basic relieving amount by reference to a taxed receipt to be calculated by reference to the fraction of the premises which is subject to the lease calculated on a "just and reasonable basis". See Change 14 in Annex 1.

1194.     Subsection (4) restricts the reduction calculated under clause 288(4) or subsection (2) of this clause to the "unused amount" of the taxed receipt by reference to which it is calculated. This is based on the general prohibition against excess relief in section 37(9) of ICTA. See Change 73 in Annex 1.

Clause 290: Meaning of "unused amount" and "unreduced amount"

1195.     This clause is based on section 37(1), (8) and (9) of ICTA.

1196.     The "unused amount" of a taxed receipt is defined in subsections (1) and (5). See Change 73 in Annex 1.

Clause 291: Deductions for expenses under section 292

1197.     This clause and the next three clauses give a tenant relief in calculating the profits of his or her property business by reference to the amount of the premium or other sum brought into account by the landlord (the "taxed receipt") in respect of the same property. This clause is based on section 37(4) and (9) of ICTA.

1198.     Section 37(4) of ICTA treats a tenant under a lease in respect of which a chargeable amount arose under section 34 or 35 of ICTA as paying rent for the purpose of computing the profits of a Schedule A business.

1199.     A deduction for rent which a tenant is treated as paying under section 37(4) of ICTA is allowed only in respect of premises used in the Schedule A business. So subsection (2) provides that a deduction for an expense which a tenant is treated as incurring under clause 292 is allowed for each "qualifying day" on which all or part of the premises subject to the taxed lease is either occupied for the purposes of the tenant's property business or is sublet.

1200.     A "qualifying day" is defined in clause 292(3) as a day which falls within the receipt period of the taxed receipt.

1201.     The amount which the tenant can deduct in respect of the rent which he or she is treated as paying under section 37(4) of ICTA is qualified by:

  • the general rules as to deductions not allowable in computing the profits of a trade in section 74(1) of ICTA; and

  • rules prohibiting or restricting the deduction of expenditure elsewhere in ICTA.

1202.     In this Bill, the rules restricting deductions are in Part 2 of Chapter 4. Section 74(1)(a) of ICTA is rewritten in clause 34. Subsection (3) of this clause preserves the interaction of section 37(4) of ICTA and the general and specific rules restricting deductions in ICTA by providing that a deduction for an expense which a tenant is treated as incurring under clause 292 is subject to the application of any provisions of Chapter 4 of Part 2 of this Bill.

1203.     Subsection (4) provides that the deduction allowed in respect of an expense under clause 292 may be restricted to prevent the cap in clause 295 on the total relief which can be given by reference to a taxed receipt being exceeded. See Change 73 in Annex 1.

 
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Prepared: 3 December 2004