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Questions and Answers
For a lease premium exceeding 50 years, how is the lease premium treated for the lessor?
For a lease premium exceeding 50 years, how is the lease premium treated for the lessor?
- Treated as a capital gain. (correct)
- Treated as taxable income.
- Exempt from taxation.
- Treated as rental income.
If a lessee incurs an expenditure for trade purposes, they can deduct the calculated amount as an expense all in the first year of the lease.
If a lessee incurs an expenditure for trade purposes, they can deduct the calculated amount as an expense all in the first year of the lease.
False (B)
Using the formula P x (1 - (L-1) x 2%), calculate the income element of a lease premium of £200,000 for a 5-year lease.
Using the formula P x (1 - (L-1) x 2%), calculate the income element of a lease premium of £200,000 for a 5-year lease.
£168,000
For a lease of less than or equal to 50 years, income tax will be payable on the amount determined by the formula P x __________.
For a lease of less than or equal to 50 years, income tax will be payable on the amount determined by the formula P x __________.
Match the following lease premium elements with their corresponding formulas:
Match the following lease premium elements with their corresponding formulas:
Flashcards
Lease > 50 years tax?
Lease > 50 years tax?
If a lease is longer than 50 years, the premium is a capital gain for the lessor and not deductible for the lessee.
Lease <= 50 years tax?
Lease <= 50 years tax?
If a lease is 50 years or less, income tax is payable on the premium.
Income element (lessor)?
Income element (lessor)?
The portion of a lease premium treated as rental income for the lessor.
Capital element (lessor)?
Capital element (lessor)?
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Lessee's deduction?
Lessee's deduction?
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Study Notes
Lease Premia Taxation
- If a lease exceeds 50 years, the lease premium is treated as a capital gain for the lessor.
- For leases over 50 years, the expenditure is disallowable for the lessee.
- If a lease is 50 years or less, income tax applies to the lease premium.
- Lessees can claim an annual equivalent of the lease premium amount, time-apportioned over the lease term.
Lease Premia (Lessor)
- Income element formula: P × (1-(L-1)×2%)
- P = amount of lease premium
- L = life of lease, in years
- Capital element formula: P × (L-1)×2%
- Example with a £100,000 lease premium for a ten-year lease:
- Income element: 100,000 × (1 – 9×2%) = £82,000, deemed rental income
- Capital element: 100,000 × 9×2% = £18,000, treated as capital receipt
Lease Premia (Lessee)
- In the example provided, with a lease premium of £100,000 for a ten-year lease, proceeds include:
- Income element: 100,000 × (1 – 9×2%) = £82,000, treated as property income
- If the lessee incurs the expenditure for trade purposes, they can deduct a calculated amount as an expense.
- This expense is spread over the life of the lease.
- Each year of the lease, the lessee can claim a deduction, calculated as £82,000 ÷ 10 years = £8,200.
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