10.7 Landlord with freehold or long leasehold grants a short lease for a premium
10.7.1 Landlord’s position
When the landlord grants a short lease for a premium, the latter is split in two:
•an income element taxed as rent; and
•the balance taxed as capital.
The amount taxed as income is given by the formula:
P is the premium; and
Y is the number of complete years that the lease is to run, less the first year.
Alternatively, the above formula can be rewritten as:
If we set Y = 50, we see that the income element is zero. No income tax charge arises, and the entire premium is taxed as capital. This is to be expected, since a lease of 51 years (Y + 1) is a long lease, and is therefore not subject to the lease premium rules.