BIM41130 - Receipts: reverse premiums: timing of the charge: the avoidance case: how to recognise it

Connected parties might create extremely long leases and spread the reverse premium over an unrealistically long period. For example, a group property company might pay a reverse premium to a group trading company as an incentive to lease trading premises for 99 years without any provision for rent reviews. The trading company could then claim that Urgent Issues Task Force Abstract 28 required it to spread the receipt over 99 years, rendering the tax effect trifling.

In order to discourage this kind of arrangement, FA99/SCH6/PARA3, ITTOIA05/S102 and ITTOIA05/S311 (4) contain special timing rules. They apply only where:

• two or more parties to the relevant arrangements are connected persons; and
• the terms of those arrangements are not such as would reasonably have been expected by parties dealing at arm's length.

Relevant arrangements are the relevant transaction, (see BIM41095), and any arrangements made in connection with it, whether earlier, simultaneously or later (FA99/SCH6/PARA8 (2)).

In ITTOIA05/S102 and ITTOIA05/S311 relevant arrangements are called property arrangements. The definition of property arrangements is in ITTOIA05/S103 (b).

Connected persons are persons connected within the meaning of ICTA88/S839 at any time in the period when the relevant arrangements (or property arrangements) are made (FA99/SCH6/PARA8 (1) and ITTOIA05/S103 (a)).

To decide whether the terms of any arrangement are not such as would reasonably have been expected from parties dealing at arm's length, the test is as follows. Do the terms of the deal actually made differ to a significant extent from terms which:

• at the time the arrangements were made,
• would be regarded as normal and reasonable,
• in the market conditions then prevailing,
• between persons dealing with each other at arm's length on the open market?

(FA99/SCH6/PARA3 (4) and ITTOIA05/S102 (2))

If you have reason to believe arrangements are uncommercial, you should seek the opinion of the District Valuer. A request for assistance should be made in the form of submission, setting out in full the terms of the arrangements made, and your reasons for seeking advice.

If the conditions for applying FA99/SCH6/PARA3, ITTOIA05/S102 or ITTOIA05/S311 (4) are met, the receipt is to be brought to account in accordance with BIM41135.