Income tax/ CGT on commercial lease premium

[problemchild]

hi

i was wondering how tax is calculated on commercial lease premums.

my accountant always sorts it out but i would like ot understand it myself (he doesnt like being asked!!).

the lease would be a 15 year one for a 70k premium.

any ideas?

thanks in advance.

[Tax Accountant]

hi

i was wondering how tax is calculated on commercial lease premums.

my accountant always sorts it out but i would like ot understand it myself (he doesnt like being asked!!).

the lease would be a 15 year one for a 70k premium.

any ideas?

thanks in advance.

From memory, 28% of £70,000 will be charged to Capital Gains Tax. The other 72% will be charged to Income Tax as rental income, spread out over the 15 years.

This is just from memory so please do not hold me to it.

ramnik

[problemchild]

thank you for clarifying that karongo it was much appreciated

just another quick question: does that now mean that this year i will have to pay income tax on 78% of 70k therefore taking me into the higher rate income tax band?

thanks again

[Tax Accountant]

thank you for clarifying that karongo it was much appreciated

just another quick question: does that now mean that this year i will have to pay income tax on 78% of 70k therefore taking me into the higher rate income tax band?

thanks again
You are not reading the answer fully. I did state that the amount will be spread over 15 years. I quote the answer below for your assistance.

QUOTE: ''The other 72% will be charged to Income Tax as rental income, spread out over the 15 years.''

Is this clear?

Could I now ask you one question?

If your accountant doesn't like being asked these questions, are you with the right accountant?

[problemchild]

I did read your response but had to ask again as this is not what my accountant did for my previous leases.

For my previous leases (they're all 15/25 years) I paid tax for the premium in the year in which they arose respectively and i only pay tax on the rent each year i.e. no IT paid yearly for the premium.

As you can understand, this was why i asked again.



And the answer to your question is no. He use to provide fantastic service but unfortunately he's expanded quite repaidly over the past few years and his service has reduced significently. He's just passed all of my work onto his new less experienced employees whilst he enjoys himself (or i assume anyway).

(And if you can find a quote for services more expensive than him i'll be surprised!)

I will be changing soon but my business/property interests are so wide-spread that i just don't have the time to gather all the information that a new accountant would need (although i do understand that most of this will be collected from my current accountant)



Although i trust all my advisers i do not believe in being overly passive - ultimately i am responsible for their actions.



thanks for helping anyway, always appreiated

[Tax Accountant]

If you think about it, premium is in effect an extra rent over the term of the lease and therefore it is only right that this should be spread over the whole term rather than be assessed in one year.

However, a premium is also like ''goodwill'' for someone to be able to walk into a lease at a favourable rent.

This is the reason that all lease premiums are to be apportioned between an amount which is to be assessed to rent and an amount which is to be assessed to Capital Gains tax. The longer the lease, the higher is the amount apportioned to premium, ie capital Gains Tax. Basically, 2% of every year of the lease, except the 1st year, is assessed to Capital gains Tax and the balance is assessed as rent but spread out over the length of the lease.

I hope this helps. I also hope that you will consider moving in the very near future to an accountant who treats you as a valuable client and also gives you the professional advice which all clients deserve.

Having said this, there are always two sides to a coin and I would not always take as gospel what one party says about the other without the other having a right of reply.

The above is not to be treated as a definitive reply and professional advice is recommended before relying on same.

Merry Christmas and a happy new year.

Ramnik