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Chapter 1: Payments connected with transferred land

Overview

942.     This Chapter is based on section 779 of ICTA. It counters certain avoidance devices based on arrangements for the sale and lease-back of land or on analogous arrangements, such as arrangements for sale of land with reservation of a rentcharge. It restricts tax relief for lease rental expenditure.

943.     This Chapter corresponds to Chapter 1 of Part 19 of CTB2, which makes similar provision for the purposes of corporation tax. It has the following structure.

  • Section 681A summarises the Chapter.

  • Sections 681AA to 681AC say when the Chapter applies and define “relevant income tax relief” and “relevant deduction from earnings”.

  • Section 681AD restricts relevant income tax relief and carries forward relief which has been denied.

  • Sections 681AE to 681AH restrict income tax relief for certain deductions from earnings and carry forward relief which has been denied.

  • Sections 681AI to 681AN are interpretative.

Section 681A: Overview

944.     This section summarises this Chapter. It is new.

Section 681AA: Transferor or associate becomes liable for payment of rent

945.     This section sets out the conditions for section 681AD or, as the case may be, section 681AE to apply in a case involving the payment of rent. It is based on section 779(1), (3), (13) and (14) of ICTA.

946.     Subsection (1) lists the conditions which must be met if section 681AD (relevant income tax relief: deduction not to exceed commercial rent) is to apply.

947.     The words “rent” and “lease” appear for the first time in this Chapter in subsection (1)(b). They are defined in section 681AL.

948.     Subsection (2) lists the conditions which must be met if section 681AE (deduction from earnings not to exceed commercial rent) is to apply.

949.     Subsection (3) explains what is meant in subsections (1)(a) and (2)(a) by “transferring” an estate or interest in land.

950.     Subsection (4) explains what is meant in this Chapter by the “transferor”.

951.     Subsections (5) and (6) explain what is meant in subsections (1)(b) and (2)(b) by becoming “liable” to make a payment.

952.     Subsection (7) preserves the rule that, if the transfer was made before the legislation was first introduced, a lease-back after that date will not activate the legislation.

Section 681AB: Transferor or associate becomes liable for payment other than rent

953.     This section sets out the conditions for the Chapter to apply in a case involving a payment other than rent. It is based on section 779(2), (3), (13) and (14) of ICTA. It is very similar in structure to section 681AA. See the commentary on that section.

954.     If, in a given case, the reader is satisfied that at least one of the conditions in section 681AA is not met and at least one of the conditions in this section is not met, the reader can conclude that as this Chapter does not have effect there is no need to read any further in it.

Section 681AC: Relevant income tax relief and relevant deduction from earnings

955.     This section lists, for the purposes of this Chapter, the deductions by way of “relevant income tax relief” and defines “relevant deduction from earnings”. It is based on section 779(13) of ICTA.

Section 681AD: Relevant income tax relief: deduction not to exceed commercial rent

956.     This section restricts income tax relief for payments falling within section 681AA or 681AB and, in certain cases, provides for such relief to be carried forward. It is based on section 779(1), (2) and (4) to (6) of ICTA.

957.     Subsection (3) puts on a clear statutory footing the practice of spreading lease rental expenditure in accordance with GAAP before applying section 779 of ICTA. This is a minor change in the law. See Change 11 in Annex 1.

958.     Section 681CC makes the same change in rewriting section 782 of ICTA.

Section 681AE: Deduction from earnings not to exceed commercial rent

959.     This section is a special rule restricting relevant deductions from earnings in relation to payments falling within section 681AA(2) or 681AB(2). It is based on section 779(1), (2), (4) and (6) of ICTA.

960.      The rules for calculating relevant deductions from earnings do not use GAAP. Accordingly, cases involving relevant deductions from earnings are excluded from the main rule in section 681AD, and sections 681AF to 681AH supplement this section.

Section 681AF: Carrying forward parts of payments

961.     This section permits amounts which have been disallowed under section 681AE to be carried forward to a later period (and thus, potentially, relieved). It is based on section 779(5) and (6) of ICTA, and is the first of three sections supplementing section 681AE.

962.     Subsections (1) to (3) specify the conditions which must be met if this section is to apply.

963.     Subsection (4) is the main operative provision.

964.     Subsection (5) permits the section to be applied repeatedly.

Section 681AG: Aggregation and apportionment of payments

965.     This section is concerned with the aggregation and apportionment of payments under the lease or rentcharge etc. It is based on section 779(6) of ICTA.

Section 681AH: Payments made for later periods

966.     This section prevents the taxpayer escaping this Chapter by labelling the bunched-up payments as payments for later periods. It is based on section 779(7) of ICTA.

Section 681AI: Exclusion of service charges etc

967.     This section is concerned with service charges and the like. It is based on section 779(6) and (12) of ICTA.

968.     Leases commonly provide for the tenant to pay the landlord not only rent but also service charges and the like, and these may be paid in a single sum; the definitions of “commercial rent” in sections 681AJ and 681AK do not include service charges etc and so this section correspondingly excludes them from the amount with which the commercial rent is compared.

969.     Subsections (3) and (4) prevent the taxpayer escaping this Chapter by agreeing to pay an excessive amount by way of service charge. They include a minor change in the law to bring it into line with Self Assessment. See Change 12 in Annex 1.

970.     The source legislation uses the term “asset”, which is defined to exclude land and interests in land. Since many readers may find this counter-intuitive, subsection (2)(b) refers to “relevant assets”. The term “relevant asset” is defined in subsection (5). Chapters 3 and 4 of this Part also use the term “relevant asset”, for the same reason. See sections 681CG and 681DO.

Section 681AJ: Commercial rent: comparison with rent under a lease

971.     This section defines “commercial rent” for the purpose of comparison with rent under a lease. It is based on section 779(8) of ICTA.

972.     Commercial rent is the rent payable under a hypothetical lease. Under subsection (3)(d), the hypothetical lease provides for rent to be payable “at an appropriate rate”. This expression is defined in subsection (4).

Section 681AK: Commercial rent: comparison with payments other than rent

973.     This section defines “commercial rent” for the purpose of comparison with payments other than rent. It is based on section 779(9) and (12) of ICTA.

974.     Commercial rent is the rent payable under a hypothetical lease. Under subsection (2)(b), the hypothetical lease is “a tenant’s repairing lease”. This expression is defined in subsection (3).

975.     Under subsection (2)(c), the hypothetical lease is “of an appropriate duration”. The rules for determining whether a lease is of an appropriate duration are laid down in subsection (4).

Section 681AL: Lease and rent

976.     This section defines “lease” and “rent” for the purposes of this Chapter. It is based on section 779(10) and (12) of ICTA.

Section 681AM: Associated persons

977.     This section defines “associated persons” for the purposes of this Chapter. It is based on section 779(11) of ICTA.

Section 681AN: Land outside the UK

978.     This section explains how expressions in this Chapter relating to interests in land in the United Kingdom and their disposition are to be interpreted in cases involving land outside the United Kingdom. It is based on section 779(12) of ICTA.

Chapter 2: New lease of land after assignment or surrender

Overview

979.     This Chapter is based on section 780 of ICTA. It deals with the situation where the existing occupier of premises incurs additional rental liability in return for the payment of a lump sum.

980.     In form, the lump sum is the consideration received for assigning the lease, usually to a charity or a pension fund, and the lease-back is at an increased rent.

981.     In substance, however, the lump sum is a loan and the additional rent represents the repayment of principal and interest.

982.     Where the Chapter applies, a proportion of the lump sum is to be treated as income of the recipient.

983.     The Chapter corresponds to Chapter 2 of Part 19 of CTB2, which makes similar provision for the purposes of corporation tax. It has the following structure.

  • Section 681B summarises the Chapter.

  • Section 681BA states when the Chapter applies.

  • Sections 681BB and 681BC tax some or all of the consideration as income.

  • Section 681BD concerns relief for rent under the new lease.

  • Sections 681BE to 681BI deal with cases in which the new lease is deemed to end.

  • Section 681BJ deals with a case in which a lease is varied to provide for increased rent.

  • Sections 681BK to 681BM are interpretative.

Section 681B: Overview

984.     This section summarises this Chapter. It is new.

985.     The word “lease” appears in subsection (1) for the first time in this Chapter. On the meaning of “lease” in this Chapter, see section 681BM.

Section 681BA: New lease after assignment or surrender

986.     This section states when this Chapter applies. It is based on section 780(1), (7) and (9) of ICTA.

987.     Subsection (1) provides that five conditions must be met if the Chapter is to apply. If, in a given case, the reader is satisfied that at least one of these conditions is not met, the reader need read no further in this Chapter.

988.     Subsection (2) specifies condition A, concerning the original lease.

989.     The word “lessee” appears in subsection (2)(a) for the first time in this Chapter. On the meaning of “lessee” in this Chapter, see section 681BM.

990.     The expression “a deduction by way of relevant income tax relief” appears in subsection (2)(b) for the first time in this Chapter. It is defined in section 681BK.

991.     Subsection (3) specifies condition B, concerning the assignment or surrender of the original lease. Section 1008 of ITA provides that in Scotland “assignment” means assignation, and thus gives effect to the application of section 24(5) of ICTA by section 780(8) of that Act. Section 1008 of ITA also provides that in Scotland “surrender” includes renunciation.

992.     Subsection (4) specifies condition C, concerning the new lease.

993.     The expression “a person linked to L” appears for the first time in this Chapter in subsection (4). It is defined in section 681BL.

994.     Subsection (5) specifies condition D, concerning the relationship between the new lease and the original lease.

995.     Condition E in subsection (6) preserves the rule that, if, before the legislation was introduced, there was a legal or equitable right to the grant of a new lease, then the grant of the new lease will not activate the legislation.

996.     Subsection (7) signposts the transitional provision based on the second limb of section 780(9) of ICTA. The “relevant provisions” are the paragraphs headed “New lease of land after assignment or surrender: right to new lease existed pre-22 June 1971” in the “sale and lease-back etc” Parts of Schedule 2 to CTB2 and Schedule 9 to this Bill.

Section 681BB: Taxation of consideration

997.     This section taxes, as if it were income, some or all of the consideration received by the lessee. It is based on section 780(1), (3), (3A), (3B), (3C), (7) and (8) of ICTA.

998.     Subsection (1) requires an “appropriate amount” of the consideration to be found.

999.     Subsection (1)(a) refers to the assignment of the original lease. Section 1008 of ITA provides that in Scotland “assignment” means assignation, and thus gives effect to the application of section 24(5) of ICTA by section 780(8) of that Act. Section 1008 of ITA also provides that in Scotland “surrender” includes renunciation.

1000.     Subsection (2) provides that the appropriate amount is not to be treated as a capital receipt.

1001.     Subsection (3) defines the appropriate amount if the term of the new lease is not more than one year. Subsection (4) defines the appropriate amount if the term of the new lease is more than one year.

1002.     In a case in which the term of the new lease (a) exceeds one year and (b) is not for a whole number of years, the formula in section 780(3) of ICTA does not expressly say how to deal with parts of years. Subsection (5) makes it clear that, in such a case, a part of a year is to be taken as an appropriate proportion of a year.

1003.     Subsection (6) provides that the way in which the appropriate amount is treated depends on whether certain specified conditions are met.

1004.     If these conditions are met, subsection (7) treats the appropriate amount as a receipt of the trade, profession or vocation mentioned in subsection (6)(a).

1005.     If the conditions in subsection (6) are not met, subsection (8) treats the appropriate amount as chargeable to income tax.

1006.     Subsection (9) quantifies the amount charged, specifies the person liable and treats the amount charged as income.

Section 681BC: Position where new lease does not include all original property

1007.     This section deals with the position where the new lease does not include all the original property. It is based on section 780(4) of ICTA.

Section 681BD: Relief for rent under new lease

1008.     This section makes it clear that the normal rules for tax relief apply to rent under the new lease. It is based on section 780(1) of ICTA and paragraph 5 of Schedule 2 to ITTOIA.

Section 681BE: New lease treated as ending

1009.     This section introduces three sections which treat the new lease as ending in certain circumstances. It is based on section 780(2) of ICTA.

1010.     Subsection (2) is a tie-breaker rule. Section 780(2) of ICTA indicates that if section 780(2)(a) and (2)(b) could both apply then only one of them applies, namely the one that produces the earlier date. Section 780(2)(b) might on its own, however, produce different dates, and it seems to take section 780(2)(b)(i) and (ii) separately (see “as the case may be”) without expressly providing which prevails. But it would be anomalous if section 780(2) included a tie-breaker rule for some but not all of the possible cases, or if it had different tie-breaker rules for different cases. Subsection (2) therefore makes it clear that the earliest date prevails in all cases.

Section 681BF: Position where rent reduces

1011.     This section deals with the position where the rent is reduced. It is based on section 780(2) and (8) of ICTA.

1012.     Subsection (1) uses the expressions “rent for a relevant period” and “following comparable period”. Subsection (2)(a), (b) and (c) define “relevant period”, “following comparable period” and “rent for a period” respectively.

1013.     Subsection (2)(a) uses the expressions “rental period” and “fifteenth anniversary [of the new lease]”. These expressions are defined in subsection (2)(d) and (e) respectively.

1014.     Subsection (3) supplements the definition of “rental period” in subsection (2)(d).

Section 681BG: Position where lease may be ended

1015.     This section deals with the position where the lease makes provision for early termination. It is based on section 780(2) and (7) of ICTA.

Section 681BH: Position where lease may be varied

1016.     This section deals with the position where the lessee has the power to vary the terms of the lease in the lessee’s favour (for example, by reducing the rent which the lessee would otherwise have to pay). It is based on section 780(2) and (7) of ICTA.

Section 681BI: Lease treated as ending: rentcharge

1017.     This section supplements the previous three; it deals with rentcharges. It is based on section 780(2) and (7) of ICTA.

Section 681BJ: Lease varied to provide for increased rent

1018.     This section deals with a case in which a lease is varied to provide for increased rent. It is based on section 780(6) of ICTA.

1019.     Subsection (1) provides that four conditions must all be met if this section is to apply.

1020.     Subsection (2) specifies condition A, concerning the original lease.

1021.     Subsection (3) specifies condition B, concerning the variation of the lease.

1022.     Subsection (4) specifies condition C, concerning the increase in the rent.

1023.     Subsection (5) specifies condition D, concerning the period within which the increased rent is to be paid.

1024.     Subsection (6) is the main operative provision. Condition A in subsection (2) is the same as condition A in section 681BA. In consequence of subsection (6)(a), condition B in that section is met. In consequence of subsection (6)(b), conditions C and D in that section are met. Accordingly, if conditions A to D in this section are met, conditions A to D in that section are met and this Chapter therefore has effect.

Section 681BK: Relevant income tax relief

1025.     This section defines deductions by way of relevant income tax relief. It is based on sections 779(13) and 780(1) of ICTA.

Section 681BL: Linked persons

1026.     This section defines “a person linked to L” in this Chapter. It is based on section 780(7) of ICTA.

Section 681BM: Lease, lessee, lessor and rent

1027.     This section concerns the meaning of “lease”, “lessee”, “lessor” and “rent”. It is based on sections 24(1) and (6) and 780(8) of ICTA.

1028.     Subsection (3) says that “lease” does not include a mortgage. This is based on section 24(1) of ICTA as applied by section 780(8) of ICTA. In fact, section 24(1) of ICTA says that a lease includes neither a mortgage nor a heritable security. A “heritable security” is the Scottish equivalent of a mortgage, although post-1970 heritable securities take the form of a standard security. Subsection (6), which is new, states that in the application of the section to Scotland, “mortgage” includes the Scottish equivalents.

1029.     Accordingly, subsection (3) has to be read as if it said that a lease includes neither a mortgage nor the Scottish equivalents. Subsection (3) therefore achieves the same effect as the source legislation, even though subsection (6) is a definition of the Scottish equivalents that contains more detail than the words “mortgage or heritable security” in section 24(1) of ICTA. The approach is the same as that already taken for income tax purposes when the definition of “lease” in section 24(1) of ICTA was rewritten in sections 364(1) and 879(1) of ITTOIA.

Chapter 3: Leased trading assets

Overview

1030.     This Chapter is based on sections 782 and 785 of ICTA.

1031.     This Chapter applies where a person carrying on a trade, profession or vocation pays rent under a lease of an asset other than land or buildings and at any time before the lease was created the asset was used either (a) in that trade, profession or vocation or (b) in another trade, profession or vocation carried on by the person who then or later was carrying on the first trade, profession or vocation and, in either case, when so used was owned by the person carrying on the trade, profession or vocation in which it was used.

1032.     If this Chapter applies, it provides that in computing the profits and gains of the trade, profession or vocation the deduction in respect of a payment under the lease must not exceed the commercial rent of the asset for the period for which the payment was made.

1033.     This Chapter corresponds to Chapter 3 of Part 19 of CTB2, which makes similar provision for the purposes of corporation tax. It has the following structure.

  • Section 681C summarises the Chapter.

  • Sections 681CA and 681CB state when the Chapter applies.

  • Section 681CC restricts income tax relief and carries forward relief which has been denied.

  • Sections 681CD and 681CE supplement section 681CC.

  • Sections 681CF and 681CG are interpretative.

Section 681C: Overview

1034.     This section summarises this Chapter. It is new.

1035.     The word “lease” appears in this section for the first time in this Chapter. It is defined in section 681CF.

Section 681CA: Professions and vocations

1036.     This section applies the Chapter not only to trades but also to professions and vocations. It is based on section 782(10) of ICTA. There is no corresponding provision in Chapter 3 of Part 19 of CTB2, which omits all references to companies carrying on professions or vocations. See the commentary on clause 837 of CTB2 and Change 4 in Annex 1 to the explanatory notes on that Bill.

 
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Prepared: 19 November 2009