1.4 Sale and leaseback

Transcription

1 Sale and Leaseback February 1994), rather than a separate source of property income, unless the property is only occupied in connection with a trade of providing services to tenants of the property. This practice has now been legislated for income and corporation tax (CTA 2009, s. 44, ITTOIA 2005, s. 21). The legislation provides that where a trader carrying on a trade obtains receipts from a letting of business accommodation that is temporarily surplus to requirements and the accommodation is not held as trading stock, the receipts are in respect of part of a building of which another part is used to carry on the trade and are relatively small, and the receipts, and the expenses of the letting, would otherwise be brought into account in calculating the profits of a property business of the trader. The trader may instead bring both the receipts and the expenses into account in calculating the profits of the trade. Presumably an appropriate proportion of any expenditure incurred in the provision of sea walls is allowable against such rental income (see HMRC Booklet IR 150: Taxation of Rents, paragraphs ). 1.4 Sale and leaseback Rent exceeding commercial rent Tax Law Rewrite This legislation was rewritten in the Corporation Tax Act 2010 and is available at Part 19 contains four Chapters (52 sections) and rewrite the rules formerly in ICTA 1988, ss The four chapters are: Chapter 1: Payments connected with transferred land Chapter 2: New lease of land after assignment or surrender Chapter 3: Leased trading assets Chapter 4: Leased assets: capital sums. Inevitably there is not a one-to-one correspondence and in consequence there is little value in attempting to provide both ICTA 1988 and CTA 2010 references. For the ICTA 1988 references, the reader is recommended to look at previous editions of this text. In summary: Chapter 1 provides that in certain circumstances where a transfer is made regarding land, and the transferor or an associate becomes liable to make a payment connected with the land, corporation tax relief for the payment is restricted. This rewrites what was previously in s. 779, ICTA

2 Occupation of Business Premises Chapter 2 provides that in certain circumstances where a lease of land is assigned or surrendered and another lease is granted or assigned consideration received for the assignment or surrender of the first lease is taxed as a trade receipt or charged to corporation tax on income, and tax relief is allowed for rent under the other lease. It also provides that in certain circumstances where a lease is varied it is treated as surrendered and another lease is treated as granted. This rewrites what was previously in s. 780, ICTA Chapters 3 and 4 apply where an asset other than land is leased: Chapter 3 provides that, in certain circumstances where a payment is made under a lease of a trading asset, corporation tax relief for the payment is restricted. Chapter 4 provides that in certain circumstances where a payment is made under a lease of an asset, and a capital sum is obtained in respect of an interest in the asset, corporation tax is charged on an amount not greater than the capital sum. New Pt. 12A, ITA 2007 has been inserted by TIOPA 2010, Sch. 4. These rewrite the income tax rules to mirror those of the CTA 2010 noted above. Disallowance of excess rent In the case of a sale and leaseback, if the rent payable under the leaseback exceeds a commercial rent, the excess is disallowed in computing business profits. The excess is available to be carried forward and may be deducted to the extent that actual future payments are less than the commercial rent for that period. The legislation actually refers to a transfer of an estate or interest in land, which includes not just a sale, but also: the grant of a lease, or any other transaction involving the creation of a new estate or interest in the land concerned; the surrender or forfeiture of an existing lease, and any transaction or series of transactions affecting land, or an estate or interest in land, such that some person is the owner, or one of the owners, before and after the carrying out of the transaction or transactions, but another person becomes or ceases to become one of the owners. The legislation also catches the situation where: (a) (b) land, or any estate or interest in land, is transferred from one person to another, as a result of any transaction or series of transactions affecting the land or any estate or interest in the land, the transferor, or any person associated with him, becomes liable to make any payment other than rent under a lease, being either a rent charge or some other payment connected with the land. The rules disallow the excess of any payment at (b) over a commercial amount. 8

3 Sale and Leaseback Commercial rent Commercial rent means the rent that might be expected to be paid under a lease of the land negotiated in the open market at the time when the actual lease was created. It is to be assumed that the open market lease: is of the same duration as the actual lease; is subject to the same terms and conditions as the actual lease as regards liability for maintenance and repairs, and provides for rent payable at uniform intervals at a uniform rate or at rates that progress in line with the actual lease. (ss. 844, 845) Short leases The additional provisions described below apply whenever a lessee of land who is entitled to tax relief in respect of the rent payable: assigns the lease or surrenders it in consideration for a capital sum not otherwise taxable as income; at a time when the lease has no more than 50 years to run, and takes (or his associate takes) a new lease of the whole or any part of the same land for a term not longer than 15 years. The provisions only apply to actual sales and not to indirect disposals, notional disposals, or disposals by way of gift, etc (CTA 2010, s. 850). Increases in rent If, instead of surrendering the lease: the lessee simply agrees with the landlord to vary its terms by increasing the rent payable in consideration for a capital sum, and the additional rent only covers a period of not more than 15 years starting with the receipt of the capital sum (or if that sum is paid in instalments, the last such instalment), the lessee is treated as if he had surrendered his original lease and had been granted a new lease of not more than 15 years but otherwise on the same terms as the original lease for this purpose (CTA 2010, s. 859). Basic charge The provisions operate to charge to tax a proportion of the amount received for the sale or surrender of the original lease as if it were an income receipt (CTA 2010, s. 853). The proportion so taxable is calculated under a formula (16 n)/15 9

4 Occupation of Business Premises where n is the term of the new lease expressed in years. If the term is less than one year, n is taken as one. Otherwise odd months and days are not mentioned. They should therefore be claimed as a part of a year, and it is believed that HMRC accept computations on this basis (CTA 2010, s. 850). Example 1.1 Wilfred Squires is treated as surrendering his 41-year lease in exchange for 35,000 and a leaseback for only ten years. His assessment under these provisions is calculated as follows: 35,000 (16 10)/15 = 14,000 The proportion of the capital sum thus treated as income is chargeable in one of two ways. If the rents payable under the original lease were deductible in a computation of trading profits, the amount is treated as a trading receipt. In any other case, it is chargeable under Schedule D Case VI (companies) or as miscellaneous income (individuals) for the year or period in which the capital sum is received (CTA 2010, s. 851 and ITTOIA 2005, s. 687). Term of leaseback The rules for ascertaining the term of the leaseback for this purpose generally rely on the provisions of the lease itself, but in some cases the lease may be treated as ending at an earlier date. Thus where the aggregate rent payable for any period beginning with the grant of the lease and ending at some time within 15 years thereafter is greater than the aggregate rent payable in the period of corresponding length immediately following that period, the leaseback is treated as having a term of length equal to that first period only. This is to overcome the problem of frontend loading, where the purchaser/lessor seeks to recover his capital outlay out of higher rents charged during the earlier years of a longer lease. Example 1.2 Wilfred Squires surrenders his 41-year lease in exchange for the sum of 35,000 and a leaseback for 40 years, under which the rent payable during the first ten years is at 10,000 per annum and thereafter at 5,000 per annum. The rents payable during the early part of the leaseback and the subsequent period of corresponding length are ascertained as follows: Years 1 to 10 10,000 per annum 10 = 100,000 Years 11 to 20 5,000 per annum 10 = 50,000 Since the aggregate rents in the first decade exceed those payable in the second decade, the new lease is treated as being for a ten-year term only. 10

5 Sale and Leaseback If either the landlord or tenant can determine the lease before the end of its term, or if the tenant can reduce the amount of rent he must pay under the lease, the lease is treated as having a term ending on the first occasion on which such determination or reduction can take place (CTA 2010, ss ). Deductions No expenditure may be deducted from the proceeds of disposal for the above purposes not even expenses incurred in arranging or carrying out the transactions. The provisions apply to the gross sum received itself. However, any part already taxed as income as a premium or trading receipt is not a capital sum for this purpose, as noted below, and only the balance is considered here. Partial leaseback If the land leased back only represents a part of the leasehold land sold, these provisions apply only to so much of the consideration received for the sale as may reasonably be apportioned to the property leased back (CTA 2010, s. 852). Property dealers Where the property is held as dealing stock, the proceeds of sale are already brought into tax as income in computing the property dealer s taxable trading profits. Again, therefore, the proceeds are not regarded as a capital sum and the provisions of this chapter do not apply. Subsequent rental payments Relief for the rents payable under the new lease may still be restricted if the rent exceeds a commercial rent, giving a double disadvantage. Exemptions and reliefs As seen, the tax charge arising under these provisions falls to be charged as trading or property income and the normal exemptions and reliefs available in respect of income charged thereunder are available here also. Losses No loss can arise under these provisions, since no expenditure may be deducted from the proceeds of sale and indeed the provisions may still apply even if the lessee makes an overall loss on the sale. Any such loss suffered on the sale is therefore dealt with under the relevant capital gains tax legislation. In fact the loss arising for capital gains tax, etc purposes is increased by the amount assessed under the provisions of this chapter since that part of the proceeds taxed as income is left out of account in computing the allowable loss for those purposes. It may be necessary to consider the possible application of the targeted anti-avoidance provisions introduced in s. 27, FA

6 Occupation of Business Premises Relief for rent The provisions discussed above only apply if tax relief was available in respect of rent payable under the original lease, by way of a deduction under one of the following specified heads: as an expense in computing the profits of a property business; as an expense in computing the profits of a trade, profession or vocation ie if paid in respect of the trader s premises; as a deduction from profits chargeable as miscellaneous income; in a management expenses claim of an investment company ie if paid in respect of the investment company s own premises; as a deduction against employment income, and as an allowable expense in computing taxable profits arising from woodlands. (CTA 2010, s. 853 and ITTOIA 2005, s. 687) Associates As mentioned, if the leaseback is taken by an associate instead of the original lessee himself, the provisions may still apply. The following are treated as associated for this purpose: an individual and his relative brother, sister, ancestor or lineal descendant and the husband or wife of such relative; an individual and his spouse or such spouse s relative as before, including the spouse s in-laws; a trustee and the settlor of the trust or anyone associated with the settlor; a person and any company or partnership controlled by that person and/or that person s associates; any two or more companies or partnerships are associated if they are under common control by any person and/or that person s associates, and joint owners are associated with any person associated with any one of them, in relation to the jointly owned property (CTA 2010, ss. 861 and 882, and see CTA 2010, s. 1124, for definition of control and ITTOIA 2005, s. 620 for definition of settlor ) Overseas property Whilst the charge to tax under these provisions is not restricted to property situated in the UK, it does only apply as and when tax relief was given for the rents payable under the original lease under one of the specified heads. Therefore, if the property is occupied for the purposes of a trade, etc, or if it is occupied in connection with an investment business carried on by a company so that rents are deductible in a management expenses claim, or similar situations, the provisions might well apply. On the other hand, if the overseas property is sub-let and the profit rental falls to be 12

7 Remediation of Contaminated Land taxed as income from a foreign possession, the legislation does not apply. It is therefore necessary to have close regard to the way in which tax relief for rental payments is granted. 1.5 Remediation of contaminated land Land Remediation Relief (LRR) Introduction Since 11 May 2001, certain expenditure incurred in cleaning up contaminated land in the UK has qualified for an enhanced (150 per cent) deduction in computing profits (CTA 2009, Pt. 14). The relief has been reviewed as part of a broader review of incentives for the development of brownfield land and significant amendments made to take effect from 1 April Guidance has been incorporated in the HMRC manual (Corporate Intangibles and Research & Development Manual: the CIRD manual) and is referred to in Revenue & Customs Brief 07/10. HMRC have also published a page on Land Remediation Relief in the Business Income Manual that explains the basics of the relief and provide directions to the main guidance in the CIRD manual. The legislation extends Land Remediation Relief (as it is now referred to) providing relief for expenditure on specified work on long-term derelict land and refocuses the relief on contamination by industrial activity: to attract LRR under the new long term derelict land heading, the land must have been derelict since the site was acquired and since 1 April The land must be acquired by a company for the purposes of a trade carried on by that company. It must be in a contaminated state at the time of acquisition and the company must incur capital expenditure which is qualifying land remediation expenditure in respect of the land (CTA 2009, s. 1144). For expenditure prior to 1 April 2009 there was no restriction if the contamination had to be dealt with as a result of a statutory obligation. For expenditure incurred on or after this date, there will be no relief for this type of expenditure. The Finance Act 2009 also introduced a tightening up of the avoidance provisions to prevent relief where the polluter obtains some sort of benefit arising from the relief without having a formal interest in the land. The person incurring the expenditure will not be able to claim LRR where the polluter has a relevant interest in the land. For this purpose, relevant interest in land includes: (a) the situation where the polluter retains a benefit in, licence to, right over or option to acquire, the land, or 13