BIM46255 - Specific deductions: premiums: trading deduction
Under ICTA88/S87 (2):
- the person who for the time being is entitled to the lease, estate or interest in the land (inclusive of buildings) in respect of which a chargeable premium arose, and
- who occupies such land for the purpose of their trade, profession or vocation,
- is to be treated as though they had paid a rent equal to the chargeable amount of the premium spread over the relevant period (as defined in ICTA88/S87 (9)).
The effect of this is that, subject to the provisions against
double allowance (see
BIM46280),a trading deduction is allowed
for the fraction of the chargeable amount of the premium
appropriate to the period during which the land was occupied for
trade purposes.
Where only part of the land in respect of which the
chargeable amount arose was occupied for trade purposes, the
trading deduction should be apportioned (ICTA88/S87 (3)).
Example
On 1 July 2000, A grants a 21-year lease of a property to B for
a premium of £300,000 and a rent of £5,000 per annum.
A is chargeable under ICTA88/S34 on £300,000 -
(£300,000 x (21 - 1) / 50) = £180,000 (see PIM1205).
B occupies the property partly for trade and partly for
residential purposes, the proportions being two-thirds and
one-third respectively.
After ten years, B vacates the whole of the property and
grants a sub-lease to C.
The annual trading deduction due to B for the period of ten
years from 1 July 1990, is computed as follows:
| Chargeable amount as above £180,000 x 1/21= | £8,572 |
| Less residential proportion (1/3) | £2,857 |
| Annual trading deduction | £5,715 |
| Add deduction for rent payable £5,000 x 2/3 | £3,334 |
| Total deduction | £9,049 |
In computing his subsequent Schedule A liability on the rent
receivable from C, B will be entitled to a deduction under
ICTA88/S37. C, however, will not be entitled to a deduction for any
part of the premium paid by B to A because C has at no time been
entitled to any interest in the lease granted by A to B.
If, in the above example, B had occupied the whole of the
property for trade purposes from 1 July 2000, to the expiry of the
lease, B would have been entitled to a trading deduction of
£8572 for each of the 21 years commencing 1 July 2000 in
addition to rent £5,000.
