1. General Principal
A distinction is made between:
a. a premium paid for the grant of a lease, and
b. a capital sum paid on the sale of a lease (an assignment)
A sale (or assignment) is a CGT matter (see PIM1204).
2.Calculation of lease expense for the new tenant
Step 1: Find out if the original tenant paid any premium for grant of lease. If no premium paid, go to step 2 otherwise continue.
Find out the income taxable in Landlord’s hand for grant of lease. Formula for this is:
P x (50-Y) / 50
Where P is Premium paid and Y is lease term in years minus 1.
See PIM1205 for an example
Step 2: Calculation of revenue expense for the old tenant
Landlord taxable Income/Lease term x1
Plus: Annual Rent Payable x
Total Revenue expense x
1. This will be zero if no premium was paid by the original tenant as mentioned in Step 1
See BIM46255 for an example
Step 3: Calculation of revenue expense for the new tenant
New tenant steps in the shoes of old tenant and can deduct
Total Revenue expense from his taxable profits as calculated in Step 2 i.e. new tenant can take trading deduction for premium paid by the old tenant.
Unfortunately, premium paid by the new tenant to old tenant on lease assignment is treated as capital payment and cannot be used as a trading deduction for the new tenant. See example BIM46265