IR32

9 March 1999

TAXATION OF REVERSE PREMIUMS

The sums landlords pay to induce potential tenants to take out a
lease - often called reverse premiums - will be subject to tax the
Chancellor confirmed today.

Such sums were often considered taxable before a recent adverse
decision of the Privy Council. The legislation will have effect for
reverse premiums payable under agreements made on or after Budget
day.

DETAILS

1. Under the proposed legislation reverse premiums will be chargeable
to income or corporation tax in the hands of the recipient. Very
broadly, the timing of the charge will follow accepted accountancy
practice. It will be spread over the period in which the reverse
premium is recognised in the accounts.

2. Where the person receiving the premium is a trader occupying the
building for which he gets the reverse premium for the purposes of
his trade, the sum received will be treated as income of the trade.

3. In most other cases, such as a receipt by an intermediate landlord
for a lease which they are to sublet, the sum received will be taxed
as income of a letting business.

4. Special rules will apply to life assurance companies which receive
reverse premiums.

5. Guidance on the Inland Revenue's view on the treatment of reverse
premiums for periods before Budget day will be issued shortly.

NOTES FOR EDITORS

1. Lump sum payments are sometimes paid upfront by a tenant to a
landlord when a lease is granted. These are known as 'premiums'.
Where they are paid for the grant of a lease of 50 years or more,
they are taxable on the landlord under Schedule A as income from
property under rules dating back to 1963.

2. Recently, more and more 'reverse premiums' have been paid. These
are sums landlords pay to induce potential tenants to take out a
lease. The Inland Revenue's view is that when the payments are made
by a developer who is trading in property and is taxable under Case I
of Schedule D they are deductible in calculating the developer's
taxable trading profits. Depending on all the circumstances, the
Revenue used to think that a corresponding charge might arise on the
recipient.

3. However the New Zealand Revenue recently took a case to the Privy
Council on reverse premiums and lost it-CIR v Wattie (29 October
1998). The Privy Council judges are effectively the Judicial
Committee of the House of Lords. In their decision they made a point
of saying that the UK law was the same as the New Zealand law. This
cast doubt on the U K Revenue's ability to tax reverse premiums under
similar circumstances.

INLAND REVENUE PRESS OFFICE
Media enquiries to: 0171 438 6692/6706/7327
(Out of hours: 0860 359544)

Non-media enquiries to:  0171 438 6420/6425
(Office hours only)

Inland Revenue information is on the Internet:
www.inlandrevenue.gov.uk

# = pounds sterling