Reverse Lease Premium or alternatively as Dilapidations?

We are in the process of negotiating a lease surrender with a retail tenant. They wish to split the value between a Reverse Lease Premium and Dilapidations.

Is anybody able to suggest what the tax implications could be for us as Landlords if we were to opt for the value to be attributable as a Reverse Lease Premium or alternatively as Dilapidations?

I suspect the Reverse Lease Premium could be defined as Revenue and therefore be taxable whereas Dilapidations is in lieu of costs to return the premises to the required state. However, I am not at all informed about this.

Many thanks.

Clinton

Editors Notes: From HMRC

A payment made by a tenant, either to surrender or assign an onerous lease, may also be referred to as a reverse premium. The treatment of such payments is covered at CG71264.

A more comprehensive explanation of the commercial background to reverse premiums is contained at BIM41050 onwards.

Recipient of Reverse Premium

The recipient of a reverse premium will often contend that the receipt is not chargeable to tax. This contention may be correct, but not always. Each case must be considered on its own particular facts.

The first question to be considered is whether the receipt is chargeable as a trade receipt in the hands of a tenant who is granted the lease for the purposes of a trade, profession or vocation, or in all other circumstances as a receipt of a property business. Guidance on this question can be found at BIM41050 onwards.

If the receipt cannot be charged to Corporation Tax or Income Tax as a trade receipt, or receipt of a property business, you will need to consider whether it is chargeable to Capital Gains Tax or Corporation Tax on Capital Gains.

It will only be so chargeable if it is derived from an asset held by the tenant. Normally, the reverse premium will be paid before the tenant has actually entered into the lease and in these circumstances it will not be possible to demonstrate that the reverse premium is derived from the lease. Unless there is some other asset from which the reverse premium derived, it will not be chargeable to Capital Gains Tax or Corporation Tax on Capital Gains.

However, it is important to establish the full facts. It may, in some limited circumstances, be possible to show that the receipt derives from some capital asset other than the lease. Possible examples are:

• the tenant may have surrendered an existing lease in order to take the new one and the receipt may, in reality, be for the surrender of the old lease;
• the receipt may derive from the tenant’s goodwill.

The above examples are not exhaustive, there may be other possibilities depending on the precise facts of each case.