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Tax Insider Tip: Surrender Premiums

24th Oct 2016
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A premium is a sum paid by a tenant to a landlord either on the creation or surrender of an interest in a property.

Surrender premiums payable to terminate a lease early are generally tax inefficient; depending upon the length of the lease and whether or not there is a provision in the agreement for early termination, the landlord will be taxed on a capital and/or revenue receipt whilst the tenant receives neither a capital nor revenue deduction.

Tax planning possibilities:
•    Rather than pay the premium the tenant incentivises a third party (the new tenant) to accept assignment of the lease. The payment is tax free in the new tenant's hands and they may be willing to accept a lower incentive from the existing tenant as a share of the tax saving from which he or she will benefit. The agreement must be made directly between the existing and new tenant without any input from the landlord.

•    The tenant offers the landlord a sum representing the future rent due with an appropriate discount to represent the cash-flow benefit to the landlord. The tenant then sub-lets to the landlord for the remainder of the lease period at a peppercorn rent, thus enabling the landlord to not lose out financially compared with an outright surrender. The tenant will be able to claim a tax deduction for the sum paid and if that amount is close to the original premium, the tax relief improves the tenant's position. The landlord would have to consider his or her position as the receipt will be of income and not capital.

This is a sample tip taken from our 165 page guide:

101 Tax Tips For Landlords 2016/17

101 Tax Tips For Landlords

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