CheckLists.Tax (beta)
K3: Grant of lease
GENERAL
Formalities
INCOME TAX
CORPORATION TAX
CAPITAL GAINS TAX
INHERITANCE TAX
- Grant of lease for less than market value as a gift/transfer of value
- If the aggregate of the premium paid for the lease plus the capitalised value of the rent at the time of grant are less than the reduction in value of the reversionary interest, there is a transfer of value.
- Commercial transaction exclusion may apply (IHTA s.10).
Agricultural tenancy
- See IHTA s.16.
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- Grant of a lease as an associated operation
- Grant of lease followed by gift of freehold may give rise to a disposition by associated operations.
- See example at IHTM14827 and IHTM14828;
- Grant of lease for full consideration cannot be associated with an operation that occurs more than 3 years later (s.268(2); IHTM14825).
Legislation:
Cases:
IHTM14825 - Lifetime transfers: associated operations: additional provisions;
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Gift with reservation of benefit
- Donor able to occupy or enjoy rights in relation to gifted land other than for full consideration: deemed gift with reservation
Deemed gift with reservation of benefit
- If T disposes of land by way of gift and later there is a right, interest or arrangement, to which T/T's spouse is a party, that allows the donor to occupy all or part of the land or enjoy some right in relation to it, gift is treated as subject to a reservation.
- Attention is not on donor's spouse's occupation/enjoyment but whether they have rights etc. that enables the donor to occupy/enjoy.
- Intended to block 'carve-out' schemes by focussing attention on donor's occupation/enjoyment.
Exceptions
- Donor can only occupy/enjoy the right in return for full consideration.
- Right/arrangement does not and cannot prevent the enjoyment of the land to the entire exclusion/virtually entire exclusion of the donor.
- Right/arrangement only entitle the donor to occupy upon the ending of the interest gifted.
- Rights or interests granted/acquired more than 7 years prior to gift. '14-year planning' possible.
Lease with deferred start date
- Where the gift is the creation of a lease with a deferred start date (reversionary lease), and the donor owned the interest out of which the lease granted for more than 7 years, HMRC accept that the 7 year let out applies (because the donor occupies under an interest held for more than 7 years), but say POAT will apply (IHTM14360).
- HMRC regard reversionary lease schemes as DOTAS-able.
Legislation: FA 1986, s.102;
Cases:
HMRC manuals: IHTM14360;
Commentary: McCutcheon 7-103;
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STAMP DUTY LAND TAX
General
- Bare trustee receives grant of lease: bare trustee is purchaser, not beneficiary
- Normally the acquisition of a chargeable interest by a bare trustee is deemed to be an acquisition by the beneficiary (Schedule 16, para 3(1)).
- That does not apply to the acquisition pursuant to the grant of a lease (para 3(2)).
- Instead, the grant is treated as an acquisition of the whole interest by the person who is the bare trustee (para 3(3)).
- Presumably an anti-avoidance provision, but mischief at which it was aimed unclear (Tower One, §100).
- As noted below, bare trustee is not treated as acquiring the interest beneficially.
- Query what effects this has more broadly on reliefs and exceptions.
Legislation: FA 2003, Schedule 16, para 3;
Cases: The Tower One St George Wharf Limited v. HMRC [2025] EWCA Civ 1588;
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- Bare trustee grants a lease: bare trustee is vendor, not beneficiary
- Normally, acts of a bare trustee in relation to a chargeable interest are deemed to be acts of the beneficiary (Schedule 16, para 3(1)).
- That does not apply to the grant of a lease (para 3(2)).
- Instead, the person who is the bare trustee is treated as the vendor of the whole interest disposed of (para 3(4)).
- Presumably an anti-avoidance provision, but mischief at which it was aimed unclear (Tower One, §100).
Interaction with the market value rule and the distribution exception
- Whilst the trustee is treated as vendor, the trustee is not treated as beneficially entitled to the interest in land out of which the lease is granted (Tower One, §99).
- This means that the trustee cannot be regarded as having made a distribution, e.g. if the lease is granted at undervalue.
- Which means that the exception to the market value rule in s.54 for distributions cannot apply (Tower One, §100).
Legislation: FA 2003, Schedule 16, para 3;
Cases: The Tower One St George Wharf Limited v. HMRC [2025] EWCA Civ 1588;
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Chargeable consideration
- Premium and net present value of rent
Lease rent charged on the basis of the net present value of the rent payable over full term
- See Sch 5, para 3 for formula.
Contingent rent
- If contingent after 5 years, use highest rent in first 5 years as annual rent.
- If contingent in first 5 years, use best estimate.
- Special rules for abnormal variations.
Contingent term
- No account taken of any contingency that may shorten term
Extended term
- More tax may be payable.
Legislation: FA 2003, s.56; Schedule 5, Schedule 17A;
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- Lease to connected company (market value)
XX
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- Consideration for grant includes shares in company connected with vendor (market value)
XX
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SDLT group relief
XX
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Relief denied: arrangements for change of control
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Relief denied
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- Intra-group grant of lease followed by sale of lessee and transfer at undervalue by lessee (s.75A tax in excess of market value)
- See G11. Intra-group transfer of assets.