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:

where:

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.

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