BIM61335 - Leasing: avoidance: sale and leaseback of land: ICTA88/S780

ICTA88/S780 deals with the situation where the existing occupier of premises incurs additional rental liability for a comparatively short period in return for the payment of a lump sum.

• In form, the lump sum is the consideration received for assigning the lease, usually to a charity or a pension fund, and the leaseback is for a short period at an increased rent.
• In substance, however, the lump sum is a loan and the additional rent represents the repayment of principal and interest.

ICTA88/S780 applies to leasebacks:

• entered into on or after 22 June 1971,
• where the unexpired term of the original lease did not exceed 50 years, and
• the leaseback is for a period of 15 years or less.

Where ICTA88/S780 applies, a proportion of the lump sum is to be treated as income of the recipient.

For example, where a lease is for 15 years, l4/l5ths of the lump sum is to be treated as a capital receipt of the lessee and 1/15th as an income receipt. In the case of leases for shorter periods, the capital element is to be correspondingly smaller and the income element greater.

Example

A professional partnership:

• occupying offices under a lease which has 8 years to run,
• at a rent of £30,000 per annum,
• assigns the remainder of the lease to a pension fund for £200,000 on 1 June 2003, and
• is granted an immediate leaseback for 8 years less one day,
• for a rent of £70,000 per annum.

The commercial rental value of the premises on 1 June 2003 is approximately £100,000 per annum.

Since the rent of £70,000 per annum is less than the commercial rent, no restriction is required under ICTA88/S779 (4).

The income proportion of the £200,000 is 8/15ths, that is, £106,666.

The balance of £93,334 is within the charge to CGT.