Nov 192014

When a landlord grants a tenant a short lease for a premium, part of the latter sum is treated as an income receipt in the hands of the landlord. The tenant is allowed to deduct this income element against his own revenue receipts, the deduction being spread over the length of the lease (we are assuming that the tenant is occupying the property for business purposes).

I know this latter fact because this is one of the topics that I learned about when I attended the courses that my employer sent me on, when I started my tax career. I also know this because I read about it in an article on buying and selling real estate which appeared in one of the various tax magazines.

That article even had the statutory reference for the tenant’s deduction, so that I could feel confident that it was a true statement. But until recently I didn’t have occasion to look too closely at what the legislation said. And when I did look, I found that the answer wasn’t as obvious as I had expected.

So today we are going to explore why and how the tenant is permitted a tax deduction. We shall ignore what we have been told or heard, no matter how reliable the source. Instead, we shall find the answer, simply by looking at the words of the relevant tax statute.

Before we start…

A word to non-tax people

You don’t have to read this article. All you need to know is that if the income element of the premium is denoted by A, and the length of the lease in years is L, then the tenant can deduct the following amount each year:

Yearly deduction = A/L

In most cases this will be correct, and if you happen to have a tax adviser, that person will advise you accordingly. You don’t have to go through the various legislative hoops that I’m going to take you through unless you want to. On the other hand, the process will give you an insight into just how hard this subject really is, if you’re not convinced already.

A word to tax practitioners and students

Actually you can skip this article too if you really don’t want to go through the pain. Because in most cases, if you were to advise that the tenant can deduct the income element of the premium over the life of the lease, you’d be right. You don’t really need to look at the legislation just to point out this fact.

However, sometimes you do have to look at the legislation. Even in cases which are “obvious”. Those of you, who are starting out in your tax careers, will have to learn how to read the legislation, no matter how distasteful it may be to you. And we hope that those of you who are already established don’t need this advice.

So now we are going to make a start. But first…

A basic principle – there is no tax symmetry between payer and payee

We shall assume that readers are already familiar with the fact that under the lease premium rules, part of the landlord’s receipt is taxed as income. But it doesn’t automatically follow that this same amount is treated as an income expense for the tenant. There is no general tax rule which preserves symmetry between payer and payee. In this case, there is indeed a symmetry but only because the legislation says so.

In the following analysis we shall assume that we have a UK corporate tenant occupying the property for trading purposes. The statutory references are therefore geared to this particular situation, but we shall also give the corresponding references for a tenant paying income tax.

Note also that similar rules apply if the tenant’s business consists in subletting the property (are you sure about that? Don’t you want to check the legislation before taking my word for it?)

Tenant tax deduction on premium

Which legislation?

Since we are considering the position of a UK company, we need to look at the provisions relating to corporation tax, in particular the Corporation Tax Act 2009 (“CTA 2009”)1. This may seem obvious, but recall that not all companies pay corporation tax. In particular an offshore landlord investing in UK property is not within the charge, but pays income tax instead2.

Since our tenant is a trading company, the following areas of CTA 2009 are relevant:

  • Part 3 is the part dealing with trading income;
  • Part 3 Chapter 4 contains the rules restricting tax deductions;
  • Part 3 Chapter 5 contains the rules permitting certain tax deductions.

In particular, Chapter 4 contains the rule that expenditure of a capital nature is not deductible in computing the company’s trading profits – however, this rule is modified when there is any express provision to the contrary3.

Now since the tenant occupies the property as a base from which it carries out its business, the lease is a capital asset. Consequently the premium paid for the lease is a capital expense and cannot normally be deducted from trading profits.

Exception under the lease premium rules

But as we know, there is an exception to the contrary, and it is to be found early on in CTA 2009 Part 4 Chapter 5, the rules permitting deductions:

  • CTA 2009 s 62(1) states that section 63 applies if land used in connection with a trade is subject to a taxed lease4;
  • CTA 2009 s 62(2) states that: “Section 63 (tenants occupying land for purposes of trade treated as incurring expenses) applies in calculating the profits of a trade carried on by the tenant under the taxed lease for the purpose of making deductions for the expenses of the trade.”5

This gives us the first clue that our corporate tenant may be able to obtain a revenue deduction. For a taxed lease is defined as including a lease that has been granted for a premium, part of which is treated as an income receipt for the landlord under the lease premium rules6.

So now we need to look more closely at what CTA 2009 s 63 says.

CTA 2009 s 63 entitles the tenant to a daily revenue deduction

First of all under CTA 2009 s 63(1)7:

“The tenant under the taxed lease is treated as incurring an expense of a revenue nature in respect of the land subject to the taxed lease for each qualifying day.”

So far so good. This confirms what we suspected from the previous section. A qualifying day is defined as being8:

  • A day that falls within the receipt period of the taxed receipt; and
  • It must also be a day on which the tenant occupies the whole or part of the land for the purpose of carrying out its trade.

What does it all mean? The first condition sounds dreadfully complicated, but turns out to be quite simple:

  • The receipt period is simply the effective duration of the lease9; and
  • The taxed receipt is simply the premium paid for the lease10.

So a day that falls within the receipt period of the taxed receipt is simply any day of the lease. Putting this all together, CTA 2009 s 63 tells us that the tenant can claim a revenue deduction for each day that it occupies the property for trading purposes.

So how much is the daily tax deduction?

Note that it is a daily deduction, not a yearly one. And we are told how to calculate this daily deduction by the formula11:


More definitions. What do these two terms mean?

  • TRP is the number of days in the receipt period – which, as we have seen before is the number of days in the lease12;
  • A is defined as the “unreduced amount of the taxed receipt”. We already know that the taxed receipt is the premium; the “unreduced amount” turns out to be that part of the premium that is treated as income for the landlord under the lease premium rules13.

So the daily deduction is simply the income element of the premium divided by the length of the lease (in days not years). And this is how it comes about that the tenant’s deduction isn’t given all in one go, but spread over the term. And if we multiply this amount by 365 we get a figure for a yearly deduction, which we could just as easily have obtained by taking the income element A and dividing it by the number of years in the lease.

Note that if the tenant only occupies a part of the property for trading purposes, the daily deduction is adjusted by a suitable fraction14.

A note about the definitions in the legislation

As you can see we had to interpret a number of definitions such as “taxed lease”, “receipt period”, “taxed receipt” and “unreduced amount”. The end result looks simple because I didn’t actually take my readers through the various parts of the legislation – I just stated the end result. But I did look at the legislation. And arriving at the answer was by no means as straightforward as it seems. The following example demonstrates the process involved.

First of all note that CTA 2009 s 62(4) sets out a list of the relevant terms that are used in the legislation15. But instead of providing a straightforward definition for each term, this subsection directs the reader to another part of the legislation – which in turn points to yet another part – and even takes you to a totally different statute.

So if we look at the term “receipt period”, we are told to go to CTA 2009 s 228(6). This doesn’t actually say that the receipt period is the length of the lease. Instead we are given five (!) options to choose from. In our case, the ones that match the particular facts are:

  • The first option (a) which defines “receipt period” as being: “in the case of a receipt under section 217…the effective duration of the lease.” And if we go to CTA 2009 s 217 we find that this is the section that charges part of the landlord’s premium to revenue under the lease premium rules. So we are on the right track, however:
  • We also need option (e) because option (a) only applies for corporation tax purposes. It wouldn’t apply to an offshore landlord subject to income tax. Option (e) does the same thing as option (a) in that it points to the relevant parts of the income tax legislation, namely ITTOIA 2005 s 288(6), which gives the right result (you can look this up yourself if you don’t believe me).

And the same process applies to all the other defined terms we had to rely on. This is a very long, arduous process at arriving at what turns out to be a simple answer to a simple question.

So when might you need to look at the legislation?

By this time I’ve probably scared off all but the most devoted of my readers!

The above demonstration might seem to be a convoluted way of arriving at the answer. Why bother when you can just look up the answer in one of the numerous textbooks that are out there? As mentioned at the start of this article – in most cases you can’t go wrong if you were to advise that the deduction is spread over the term of the lease.

But what is the position if the tenant surrenders the lease before the term is up? For example, consider a 15 year lease, which is surrendered after just three years because the tenant stops trading. He will have already claimed 3 years worth of tax relief in respect of the income element of the premium – what happens to the balance?

We shall find out the answer in the next article – but you are free to find it for yourself. All you need to do is look at the legislation!


  1. CTA 2009 ss 2, 5.
  2. CTA 2009 s 19 – offshore companies are subject to corporation tax only if they trade in the UK through a permanent establishment. Of course, a non-resident company occupying the property for trading purposes falls squarely within the charge.
  3. CTA 2009 s 53; ITTOIA 2005 s 33.
  4. Income tax provision – ITTOIA ss 60(1), 61.
  5. Income tax provision – ITTOIA 2005 s 60(2).
  6. CTA 2009 ss 62(4), 227(4); ITTOIA 2005 ss 60(4), 287(4).
  7. Income tax provision ITTOIA 2005 s 61(1).
  8. CTA 2009 s 63(3); ITTOIA 2005 s 61(3).
  9. CTA 2009 ss 62(4), 228(6); ITTOIA 2005 ss 60(4), 288(6).
  10. CTA 2009 ss 62(4), 227(4); ITTOIA 2005 ss 60(4), 287(4).
  11. CTA 2009 s 63(4); ITTOIA 2005 s 61(4).
  12. CTA 2009 s 63(4); ITTOIA 2005 s 61(4).
  13. CTA 2009 ss 62(4), 230(2); ITTOIA 2005 ss 60(4); 290(2).
  14. CTA 2009 s 63(5); ITTOIA 2005 s 61(5).
  15. The corresponding income tax definitions are at ITTOIA 2005 s 60(4).
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Satwaki Chanda

Satwaki Chanda

Satwaki Chanda is a tax lawyer with a First Class degree in Mathematics. Called to the Bar in 1992, he is the Editor of Tax Notes.
Satwaki Chanda

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