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Income Tax Act 2007

Type Public General Act

Publication 2007-03-20

Last updated 2026-01-20

State In force

Department Statute Law Database

Source legislation.gov.uk

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(4) This subsection applies if the finance lease or loan falls for accounting purposes to be treated, in accordance with generally accepted accounting practice, as subsisting for the purposes of consolidated group accounts of a group of companies of which L is a member.

(5) Condition B is that, under the leasing arrangements, there is or may be payable to L, or to a person connected with L, a sum (a “major lump sum”) that is not rent but falls for accounting purposes to be treated, in accordance with generally accepted accounting practice—

(a) as to part, as repayment of some or all of the investment in respect of a finance lease or loan, and

(b) as to part, as a return on investment in respect of a finance lease or loan.

(6) Condition C is that not all of that part of the sum that falls within subsection (5)(b) would, apart from this Chapter, fall to be brought into account for income tax purposes in tax years ending with the relevant tax year as the normal rent from the lease for periods of account of L.

(7) Condition D is that, in relation to L at the relevant time—

(a) the period of account of L in which the relevant time falls, or

(b) an earlier period of account of L during which L was the lessor,

is a period of account for which the accountancy rental earnings in respect of the lease exceed the normal rent for the period.

(8) Condition E is that at the relevant time—

(a) arrangements within section 614BE(1) exist, or

(b) paragraph (a) does not apply and circumstances within section 614BE(3) exist.

(9) Section 614BD supplements this section.

614BD

(1) In section 614BC—

“the relevant tax year”, in relation to a major lump sum, means—the tax year which is related to the period of account of the lessor (“L”) in which the major lump sum is or may be payable in accordance with the leasing arrangements, orif there are two or more such tax years, the latest of them, and

“the relevant time” means the time as at which it must be determined for the purposes of section 614BB(1) or (3) whether the conditions in section 614BC are or, as the case may be, were met.

(2) For the meaning of a tax year being related to a period of account, see section 614DB(4).

(3) Subsection (4) applies for determining the normal rent for a period of account for the purpose of determining whether condition D in section 614BC is met as respects L unless subsection (5) applies.

(4) Rent that falls to be brought into account for income tax purposes as it falls due is treated—

(a) as accruing evenly throughout the period to which, in accordance with the terms of the lease, each payment falling due relates, and

(b) as falling due as it so accrues.

(5) This subsection applies if any such payment as is mentioned in subsection (4)(a) falls due more than 12 months after the time at which any of the rent to which that payment relates is treated as accruing under subsection (4)(a).

614BE

(1) The arrangements referred to in section 614BC(8)(a) are arrangements under which—

(a) the lessee or a person connected with the lessee may acquire, whether directly or indirectly, the leased asset or an asset representing the leased asset from the lessor or a person connected with the lessor, and

(b) in connection with that acquisition, the lessor or a person connected with the lessor may receive, whether directly or indirectly, a qualifying lump sum from the lessee or a person connected with the lessee.

(2) In this section “qualifying lump sum” means any sum that is not rent but at least part of which would fall for accounting purposes to be treated, in accordance with generally accepted accounting practice, as a return on investment in respect of a finance lease or loan.

(3) The circumstances referred to in section 614BC(8)(b) are circumstances which make it more likely—

(a) that the events described in subsection (4) will occur, than

(b) that the event described in subsection (5) will occur.

(4) The events mentioned in subsection (3)(a) are—

(a) that the lessee or a person connected with the lessee will acquire, whether directly or indirectly, the leased asset or an asset representing the leased asset from the lessor or a person connected with the lessor, and

(b) that, in connection with that acquisition, the lessor or a person connected with the lessor will receive, whether directly or indirectly, a qualifying lump sum from the lessee or a person connected with the lessee.

(5) The event mentioned in subsection (3)(b) is that, before any such acquisition as is mentioned in subsection (4) takes place, the leased asset or, as the case may be, the asset representing the leased asset, will have been acquired, in a sale on the open market, by an independent third party.

(6) In subsection (5) “independent third party” means a person who—

(a) is not the lessor or the lessee, and

(b) is not connected with either of them.

(7) For the meaning of an asset representing the leased asset, see section 614DD.

Current lessor taxed by reference to accountancy rental earnings

614BF

(1) This section applies if, in the case of any period of account of the current lessor (“L”)—

(a) this Chapter applies in relation to the lease, and

(b) the accountancy rental earnings in respect of the lease for that period of account exceed the normal rent for that period.

(2) For income tax purposes, L is treated as if in that period of account L had been entitled to, and there had arisen to L, rent from the lease of an amount equal to those accountancy rental earnings (instead of the normal rent referred to in subsection (1)(b)).

(3) Such rent from the lease of an asset is treated for income tax purposes—

(a) as if it had accrued at an even rate throughout so much of the period of account as falls within the period for which the asset is leased, and

(b) as if L had become entitled to it as it accrued.

Reduction of taxable rent by cumulative rental excesses

614BG

(1) This section and sections 614BH to 614BK provide for reductions of the taxable rent of a current lessor (“L”) under a lease to which this Chapter applies.

(2) In this section and sections 614BH to 614BK “taxable rent”, in relation to a period of account of L, means the amount that would, apart from those sections, be treated for income tax purposes as rent from the lease that arises to L in that period of account for the purpose of determining L's liability to tax for the related tax year or years.

(3) The reductions of taxable rent under sections 614BH to 614BK depend on there being—

(a) a cumulative accountancy rental excess for the period of account of L in question, or

(b) a cumulative normal rental excess for the period of account of L in question.

(4) For the meaning of “cumulative accountancy rental excess” and “cumulative normal rental excess”, see sections 614BH and 614BJ respectively.

614BH

(1) For the purposes of this Chapter, there is an “accountancy rental excess” in relation to the lease for a period of account of the current lessor (“L”) if the taxable rent in relation to the lease for the period is as a result of section 614BF (current lessor taxed by reference to accountancy rental earnings) an amount equal to the accountancy rental earnings.

(2) The amount of the accountancy rental excess for the period is equal to the difference between the accountancy rental earnings for the period and the normal rent for the period.

(3) But if the taxable rent for the period is reduced under section 614BK (reduction of taxable rent by the cumulative normal rental excess), there is only an accountancy rental excess for the period if—

(a) the accountancy rental earnings, reduced by an amount equal to the reduction under that section, exceed

(b) the normal rent.

(4) And in that case the amount of the accountancy rental excess for the period is equal to that excess.

(5) In this Chapter the “cumulative accountancy rental excess”, in relation to the lease and a period of account of L, means so much of the total of the accountancy rental excesses for previous periods of account of L (as increased under section 614BM: recovery of bad debts following reduction under section 614BL) as has not been—

(a) set off under section 614BI (reduction of taxable rent by the cumulative accountancy rental excess) against the taxable rent for any such previous period,

(b) reduced under section 614BL (relief for bad debts: reduction of cumulative accountancy rental excess), or

(c) set off under section 37A of TCGA 1992 (consideration on disposal of certain leases) against the consideration for a disposal.

614BI

(1) This section applies if a period of account of the current lessor (“L”) is one for which—

(a) the normal rent in relation to the lease exceeds the accountancy rental earnings, and

(b) there is a cumulative accountancy rental excess.

(2) The taxable rent for the period of account is reduced by setting against it the cumulative accountancy rental excess (but not so as to reduce that rent below the amount of the accountancy rental earnings).

(3) But see section 614BL(3) and (4) (under which the amount of the cumulative accountancy rental excess which may be set against the taxable rent is limited in some circumstances).

614BJ

(1) For the purposes of this Chapter, there is a “normal rental excess” in relation to a lease for any period of account of the current lessor (“L”) throughout which the leasing arrangements fall for accounting purposes to be treated, in accordance with generally accepted accounting practice, as a finance lease or loan if—

(a) the normal rent for the period, exceeds

(b) the accountancy rental earnings for the period.

(2) The amount of the normal rental excess for that period is equal to that excess.

(3) But if the taxable rent for the period is reduced under section 614BI (reduction of taxable rent by the cumulative accountancy rental excess), there is only a normal rental excess for the period if—

(a) the normal rent, reduced by an amount equal to the reduction under that section, exceeds

(b) the accountancy rental earnings.

(4) And in that case the amount of the normal rental excess for the period is equal to that excess.

(5) In this Chapter “cumulative normal rental excess”, in relation to the lease and a period of account of L, means so much of the total of the normal rental excesses for previous periods of account of L (as increased under section 614BO: recovery of bad debts following reduction under section 614BN) as has not been—

(a) set off under section 614BK (reduction of taxable rent by the cumulative normal rental excess) against the taxable rent for any such previous period, or

(b) reduced under section 614BN (relief for bad debts: reduction of cumulative normal rental excess).

614BK

(1) This section applies if a period of account of the current lessor (“L”) is one for which—

(a) the taxable rent in relation to the lease is as a result of section 614BF (current lessor taxed by reference to accountancy rental earnings) an amount equal to the accountancy rental earnings, and

(b) there is a cumulative normal rental excess.

(2) The taxable rent for the period of account is reduced by setting against it the cumulative normal rental excess (but not so as to reduce that rent below the amount of the normal rent).

(3) But see section 614BN(3) and (4) (under which the amount of the cumulative normal rental excess which may be set against the taxable rent is limited in some circumstances).

Relief for bad debts by reduction of cumulative rental excesses

614BL

(1) This section applies if in relation to the lease for any period of account of the current lessor—

(a) there is a cumulative accountancy rental excess, and

(b) a bad debt deduction falls to be made in respect of rent from the lease.

(2) If for that period—

(a) the accountancy rental earnings in relation to the lease exceed the normal rent, and

(b) the amount of the bad debt deduction exceeds the amount of the accountancy rental earnings,

the cumulative accountancy rental excess for that period is reduced by the amount of the excess of that deduction over those earnings (but not so as to reduce the amount of that rental excess below nil).

(3) Subsections (4) and (5) apply if for that period the accountancy rental earnings in relation to the lease do not exceed the normal rent.

(4) The amount of the cumulative accountancy rental excess that may be set against the taxable rent for that period under section 614BI(2) (reduction of taxable rent by the cumulative accountancy rental excess) is limited to the amount (if any) by which the normal rent exceeds the bad debt deduction.

(5) If for that period the bad debt deduction exceeds the normal rent, the cumulative accountancy rental excess for that period is reduced by the amount of that excess (but not so as to reduce the amount of that rental excess below nil).

(6) In this section—

“bad debt deduction”, in relation to a period of account of the lessor, means the total of any sums falling within section 35(1)(a), (b) or (c) of ITTOIA 2005 in respect of amounts in respect of rents from the lease of the asset which are deductible as expenses for that period, and

“taxable rent” has the meaning given in section 614BG(2).

614BM

(1) This section applies if in relation to the lease—

(a) the cumulative accountancy rental excess for any period of account of the current lessor (“L”) has been reduced under section 614BL(2) or (5) because of a bad debt deduction,

(b) in a subsequent period of account of L, an amount (“the relevant credit”) is recovered or credited in respect of the amount which constituted the bad debt deduction, and

(2) The cumulative accountancy rental excess for the subsequent period is increased.

(3) If the relevant credit does not exceed the total of the reductions under section 614BL(2) or (5), the increase is by the relevant credit.

(4) Otherwise, the increase is limited to that total.

(5) In this section “bad debt deduction” has the meaning given in section 614BL(6).

614BN

(1) This section applies if in relation to the lease for any period of account of the current lessor—

(a) there is a cumulative normal rental excess, and

(b) a bad debt deduction falls to be made in respect of rent from the lease.

(2) If for that period—

(a) the accountancy rental earnings in the case of the lease do not exceed the normal rent, and

(b) the amount of the bad debt deduction exceeds the amount of that rent,

the cumulative normal rental excess for that period is reduced by the amount of the excess of that deduction over that rent (but not so as to reduce the amount of that rental excess below nil).

(3) Subsections (4) and (5) apply if for that period the accountancy rental earnings in relation to the lease exceed the normal rent.

(4) The amount of the cumulative normal rental excess that may be set against the taxable rent for that period under section 614BK (reduction of taxable rent by the cumulative normal rental excess) is limited to the amount (if any) by which the accountancy rental earnings exceed the bad debt deduction.

(5) If for that period the bad debt deduction exceeds the accountancy rental earnings, the cumulative normal rental excess for that period is reduced by the amount of the excess (but not so as to reduce the amount of that rental excess below nil).

(6) In this section, in relation to a period of account of the lessor—

“bad debt deduction” has the meaning given in section 614BL(6), and

“taxable rent” has the meaning given in section 614BG(2).

614BO

(1) This section applies if in relation to the lease—

(a) the cumulative normal rental excess for any period of account of the current lessor (“L”) has been reduced under section 614BN(2) or (5) as a result of a bad debt deduction,

(b) in a subsequent period of account of L, an amount (“the relevant credit”) is recovered or credited in respect of the amount which constituted the bad debt deduction, and

(2) The cumulative normal rental excess for the subsequent period is increased.

(3) If the relevant credit does not exceed the total of the reductions under section 614BN(2) or (5), the increase is by the relevant credit.

(4) Otherwise, the increase is limited to that total.

(5) In this section “bad debt deduction” has the meaning given in section 614BL(6).

Effect of disposals

614BP

(1) This section applies if the current lessor (“L”) or a person connected with L disposes of—

(a) the lessor's interest under the lease,

(b) the leased asset, or

(2) This Part has effect as if immediately before the disposal a period of account of L ended and another began.

(3) If—

(a) two or more disposals within subsection (1) are made at the same time, and

(b) there is any cumulative accountancy rental excess for any period of account of L in which the disposal occurs,

subsection (2) has effect in relation to those disposals as if they together constituted a single disposal.

(4) In this section “dispose” and “disposal” are to be read in accordance with TCGA 1992.

(5) In cases where there is any cumulative accountancy rental excess for L's period of account in which the disposal occurs, section 37A of that Act (consideration on disposal of certain leases) makes provision for the purposes of that Act about the reduction of the consideration for the disposal by that excess in determining if a gain has accrued.

614BQ

(1) This section applies if—

(a) the current lessor (“L”) assigns the lessor's interest under the lease, and

(b) the assignment is a disposal on which, as a result of any of the no gain/no loss provisions, neither a gain nor a loss accrues.

(2) This Part has effect as if—

(a) a period of account of L (“L's period”) ended with the assignment, and

(b) a period of account of the assignee (“A's period”) began with the assignment.

(3) Any cumulative accountancy rental excess for L's period becomes the cumulative accountancy rental excess for A's period.

(4) Any cumulative normal rental excess for L's period becomes the cumulative normal rental excess for A's period.

(5) If the assignee is a company subject to the charge to corporation tax on income, so far as this section relates to the assignee, it applies for the purposes of Part 21 of CTA 2010 as it would otherwise apply for the purposes of this Part.

(6) In this section “the no gain/no loss provisions” has the same meaning as in TCGA 1992 (see section 288(3A) of that Act).

Capital allowances: claw-back of major lump sum

614BR

(1) This section and sections 614BS to 614BW apply if an occasion occurs on which a major lump sum falls to be paid in relation to the lease of the asset.

(2) In those sections the occasion is called “the relevant occasion”.

614BS

(1) This section applies if capital expenditure incurred by the current lessor (“L”) in respect of the leased asset is or has been taken into account for the purposes of any allowance or charge under—

(a) Part 2 of CAA 2001 (plant and machinery allowances),

(b) Part 5 of that Act (mineral extraction allowances), or

(2) The Part of that Act in question (“the relevant Part”) has effect as if the relevant occasion were an event (“the relevant event”) as a result of which a disposal value is to be brought into account of an amount equal to the amount or value of the major lump sum (but subject to any applicable limiting provision).

(3) In this section “limiting provision” means a provision to the effect that the disposal value of the asset in question is not to exceed an amount (“the limit”) described by reference to capital expenditure incurred in respect of the asset.

(4) Subsection (5) applies if—

(a) as a result of subsection (2), a disposal value (“the relevant disposal value”) falls or has fallen to be brought into account by a person in respect of the leased asset for the purposes of the relevant Part, and

(b) a limiting provision has effect in the case of that Part.

(5) The limiting provision has effect (so far as it would not otherwise do so), in relation to the relevant disposal value and any simultaneous or later disposal value, as if—

(a) it did not limit any particular disposal value, but

(b) it limited the total amount of all the disposal values brought into account for the purposes of the relevant Part by L in respect of the leased asset.

(6) In subsection (5) “simultaneous or later disposal value” means any disposal value which falls to be brought into account by L in respect of the leased asset as a result of any event occurring at the same time as, or later than, the relevant event.

614BT

(1) This section applies if any allowance is or has been given in respect of capital expenditure incurred by the current lessor (“L”) in respect of the leased asset under any provision of CAA 2001 other than—

(a) Part 2 of CAA 2001 (plant and machinery allowances),

(b) Part 5 of that Act (mineral extraction allowances), or

(2) The amount specified in subsection (3) is treated, in relation to L, as if it were a balancing charge to be made on L for the chargeable period in which the relevant occasion falls.

(3) That amount is an amount equal to—

(a) the total of the allowances given as mentioned in subsection (1) (so far as not previously recovered or withdrawn), or

(b) if it is less, the amount or value of the major lump sum.

(4) In this section “chargeable period” has the meaning given by section 6 of CAA 2001.

614BU

(1) This section applies if any deduction is or has been allowed to the current lessor (“L”) in respect of capital expenditure incurred in connection with the leased asset as a result of—

(a) section 165 or 168 of ITTOIA 2005 (preparation and restoration expenditure in relation to waste disposal site), or

(b) section 170 of that Act (cemeteries and crematoria: deduction for capital expenditure).

(2) L is treated as if trading receipts arose to L from the trade in question on the relevant occasion.

(3) The amount of those receipts is equal to the lesser of—

(a) the amount or value of the major lump sum, and

(b) the deductions previously allowed.

614BV

(1) This section applies if—

(a) any relevant deduction has been allowed to the current lessor (“L”) in respect of expenditure incurred in connection with the leased asset, and

(b) the amount or value of the major lump sum exceeds so much of that sum as was treated as receipts of a revenue nature under section 134(2) of ITTOIA 2005 (disposal proceeds of original master version of film or sound recording treated as receipt of a revenue nature).

(2) In subsection (1) “relevant deduction” means any deduction as a result of—

(a) section 135 of ITTOIA 2005 (allocation of expenditure on master versions of films or sound recordings to periods), or

(b) section 138, 138A, 139 or 140 of that Act (relief for production or acquisition expenditure in respect of films).

(3) L is treated as if receipts of a revenue nature arose to L from the trade or business in question on the relevant occasion.

(4) The amount of those receipts is equal to the excess mentioned in subsection (1)(b).

614BW

(1) This section applies if—

(a) section 614BS or 614BT applies in relation to a leased asset,

(b) allowances are or have been made to a person (“the contributor”) as a result of sections 537 to 542 of CAA 2001 (allowances in respect of contributions to capital expenditure), and

(c) those allowances are or were in respect of the contributor's contribution of a capital sum to expenditure on the provision of the leased asset.

(2) Section 614BS or, as the case may be, section 614BT has effect in relation to the contributor and those allowances as it has effect in relation to the current lessor and allowances in respect of capital expenditure incurred by the current lessor in respect of the leased asset.

Schemes to which this Chapter does not at first apply

614BX

(1) This section applies if—

(a) the lease of an asset forms part of a pre-26 November 1996 scheme, but

(b) the conditions in section 614BC become met after 26 November 1996.

(2) For the meaning of “forming part of a pre-26 November 1996 scheme”, see section 614D.

(3) This Part has effect as if—

(a) a period of account (“period 1”) of the current lessor (“L”) ended immediately before the time at which those conditions become met,

(b) another period of account of L (“period 2”) began immediately before that time and ended immediately after that time, and

(4) If, on the continuous application assumption (see subsection (9)), there would be an amount of cumulative accountancy rental excess for period 2, that amount is the cumulative accountancy rental excess for period 2.

(5) If subsection (4) applies, L is treated for income tax purposes as if in period 1 L had been entitled to, and there had arisen to L, rent from the lease of an amount equal to that cumulative accountancy rental excess.

(6) The amount of rent mentioned in subsection (5)—

(a) is in addition to any other rent from the lease for period 1, and

(b) is left out of account for the purposes of section 614BF (current lessor taxed by reference to accountancy rental earnings).

(7) Rent within subsection (5) is treated for income tax purposes as if it had accrued and L had become entitled to it immediately before the end of period 1.

(8) If, on the continuous application assumption, there would be an amount of cumulative normal rental excess for period 2, that amount is the cumulative normal rental excess for period 2.

(9) In this section “the continuous application assumption” means the assumption that this Chapter (other than this section) had applied in the case of the lease at all times on or after 26 November 1996.

(10) If at any time the person who was the lessor at that time was a person within the charge to corporation tax on income, the reference in subsection (9) to this Chapter (other than this section) includes a reference to Chapter 2 of Part 21 of CTA 2010 (other than section 923 of that Act).

614BY

(1) This section applies if—

(a) the conditions in section 614BC become met in the case of the lease of the asset, and

(b) immediately before those conditions become met, Chapter 3 applied.

(2) Subsection (3) applies for the purpose of determining—

(a) the cumulative accountancy rental excess for any period of account ending after those conditions become met, or

(b) the cumulative normal rental excess for any such period.

(3) This Part has effect as if this Chapter had applied in relation to the lease at any time when Chapter 3 applied in relation to it.

(4) If at any time the person who was the lessor at that time was a person within the charge to corporation tax on income—

(a) the reference in subsection (1)(a) to the conditions in section 614BC becoming met at that time includes a reference to the conditions in section 902 of CTA 2010 becoming so met,

(b) the reference in subsection (1)(b) to Chapter 3 applying immediately before that time includes a reference to Chapter 3 of Part 21 of that Act so applying, and

(c) the reference in subsection (3) to Chapter 3 applying at that time includes a reference to Chapter 3 of that Part so applying.

Chapter 3 — Other finance leases

Introduction

614C

(1) This Chapter applies to arrangements involving the lease of an asset that—

(a) fall to be treated, in accordance with generally accepted accounting practice, as a finance lease or loan, but

(b) are not arrangements to which Chapter 2 applies.

(2) It does not matter whether the arrangements are or have been entered into by companies or other persons.

614CA

(1) The main purpose of this Chapter where there are arrangements to which this Chapter applies is to charge a person entitled to the lessor's interest under the lease of the asset to income tax on amounts of income determined as mentioned in subsection (2).

(2) The amounts referred to in subsection (1) are determined by reference to the amounts that fall for accounting purposes to be treated, in accordance with generally accepted accounting practice, as the income return on and after 26 November 1996 on investment in respect of the finance lease or loan.

(3) The amounts referred to in subsection (1) are also determined taking into account the substance of the matter as a whole, including, in particular, the state of affairs—

(a) as between connected persons, or

(b) within a group of companies,

as reflected or falling to be reflected in accounts of any of those persons or in consolidated group accounts.

Leases to which this Chapter applies

614CB

(1) This Chapter applies if—

(a) a lease of an asset is or has been granted on or after 26 November 1996,

(b) the lease forms part of a post-25 November 1996 scheme,

(c) condition A in section 614BC is or has been met at some time on or after 26 November 1996 in relation to the lease in a period of account of the current lessor (“L”), and

(d) Chapter 2 does not apply in relation to the lease because of the other conditions in that section not all being, or having been, met as mentioned in section 614BB.

(2) For the meaning of “forming part of a post-25 November 1996 scheme”, see section 614D.

(3) This Chapter does not apply so far as, in relation to L, the lease falls to be regarded as a long funding lease for the purposes of Part 2 of CAA 2001 (plant and machinery allowances) in accordance with Chapter 6A of that Part (interpretation of provisions about long funding leases) (see section 70G of that Act).

(4) If condition A in section 614BC has been met at any time on or after 26 November 1996 in a period of account of the person who was at that time the lessor, it is taken to continue to be met unless and until one of the conditions in subsection (5) is met.

(5) The conditions are that—

(a) the asset ceases to be leased under the lease, or

(b) the lessor's interest under the lease is assigned to a person who is not connected with any of the persons specified in subsection (6).

(6) Those persons are—

(a) the assignor,

(b) any person who was the lessor at some time before the assignment, and

(c) any person who at some time after the assignment becomes the lessor pursuant to arrangements made by a person who was the lessor, or was connected with the lessor, at some time before the assignment.

(7) If at any time the person who was the lessor at that time was a person within the charge to corporation tax on income—

(a) the reference in subsection (4) to condition A in section 614BC having been met at that time includes a reference to condition A in section 902 of CTA 2010 having been so met, and

(b) the reference in subsection (1)(d) to the other conditions in section 614BC not having been met as mentioned in section 614BB includes a reference to the other conditions in section 902 of that Act not having been met as mentioned in section 901 of that Act.

(8) Nothing in subsection (4) prevents this Chapter from applying again in relation to the lease where the lessor's interest is assigned if the conditions for its application are met after the assignment.

Current lessor taxed by reference to accountancy rental earnings

614CC

(1) This section applies if, in the case of any period of account of the current lessor (“L”)—

(a) this Chapter applies in relation to the lease, and

(b) the accountancy rental earnings in respect of the lease for that period of account exceed the normal rent for that period.

(2) For income tax purposes, L is treated as if in that period of account L had been entitled to, and there had arisen to L, rent from the lease of an amount equal to those accountancy rental earnings (instead of the normal rent referred to in subsection (1)(b)).

(3) Such rent from the lease of an asset is treated for income tax purposes—

(a) as if it had accrued at an even rate throughout so much of the period of account as falls within the period for which the asset is leased, and

(b) as if L had become entitled to it as it accrued.

Application of provisions of Chapter 2 for purposes of this Chapter

614CD

Sections 614BG to 614BQ apply for the purposes of this Chapter as they apply for the purposes of Chapter 2, but taking the references in sections 614BH(1) and 614BK(1)(a) to section 614BF as references to section 614CC.

Chapter 4 — Supplementary provisions

614D

(1) For the purposes of this Part, a lease of an asset—

(a) forms part of a pre-26 November 1996 scheme if (and only if) the conditions in subsection (2) or (3) are met, and

(b) in any other case, forms part of a post-25 November 1996 scheme.

(2) The conditions in this subsection are that—

(a) a contract in writing for the lease of the asset was made before 26 November 1996,

(b) either—

(i) the contract was unconditional, or

(ii) if the contract was conditional, the conditions were met before that date, and

(3) The conditions in this subsection are that—

(a) a contract in writing for the lease of the asset was made before 26 November 1996,

(b) the condition in subsection (2)(b) or (c) was not met in the case of the contract,

(i) the contract was unconditional, or

(ii) if the contract was conditional, the conditions were met before the end of the finalisation period or within such further period as the Commissioners for Her Majesty's Revenue and Customs may allow in the particular case,

(d) no terms remain to be agreed after the end of the finalisation period or such further period as those Commissioners may so allow, and

(e) the contract in its final form was not materially different from the contract as it stood when it was made before 26 November 1996.

(4) In subsection (3) “the finalisation period” means the period which ended with the later of—

(a) 31 January 1997, and

(b) the end of the period of six months beginning with the day after that on which the contract was made as mentioned in subsection (3)(a).

614DA

(1) Subsection (2) applies if a period of account of the lessor (“L”) does not coincide with a period of account of a person connected with L.

(2) Any amount which falls for the purposes of this Part to be found for L's period of account but by reference to the connected person is found by making such apportionments as may be necessary between two or more periods of account of the connected person.

(3) Subsection (4) applies if a period of account of L does not coincide with a period for which consolidated group accounts of a group of companies of which L is a member fall to be prepared.

(4) Any amount which falls for the purposes of this Part to be found for L's period of account but by reference to the consolidated group accounts is found by making such apportionments as may be necessary between two or more periods for which consolidated group accounts of the group fall to be prepared.

(5) Any apportionment under subsection (2) or (4) must be made in proportion to the number of days in the respective periods that fall within L's period of account.

614DB

(1) In this Part “period of account” means a period for which accounts are made up.

(2) Except for the purposes of sections 614BB to 614BE and subsection (3), in this Part “period of account” does not include a period that begins before 26 November 1996.

(3) But this Part applies in relation to a period of account that begins before 26 November 1996 and ends on or after that date as if—

(a) so much of the period as falls before that date, and

(b) so much of the period as falls on or after that date,

were separate periods of account.

(4) For the purposes of this Part, a tax year is related to a period of account if the tax year consists of or includes the whole or any part of the period of account.

(5) For the purposes of this Part a period of account is related to a tax year if the tax year is related to the period of account.

614DC

(1) For the purposes of this Part in its application as a result of any leasing arrangements, if a person (“A”) is connected with another (“B”) at some time during the relevant period A is treated as being connected with B throughout that period.

(2) The relevant period is the period that—

(a) begins at the earliest time at which any of the arrangements were made, and

(b) ends when the current lessor finally ceases to have an interest in the asset or any arrangements relating to it.

614DD

(1) For the purposes of this Part, the assets described in subsection (2) are treated as representing the leased asset.

(2) Those assets are—

(a) any asset derived from the leased asset or created out of it,

(b) any asset from which the leased asset was derived or out of which the leased asset was created,

(d) any asset that derives the whole or a substantial part of its value from the leased asset or an asset that itself represents the leased asset.

614DE

(1) This Part has effect in relation to a body corporate that—

(a) is a parent undertaking, but

(b) for accounting purposes is not required to prepare consolidated group accounts in accordance with generally accepted accounting practice,

as if it were so required.

(2) For the purposes of subsection (1) it does not matter where the body corporate is incorporated.

(3) In subsection (1) “parent undertaking” is to be read in accordance with section 1162 of the Companies Act 2006.

614DF

All such assessments and adjustments must be made as are necessary to give effect to this Part.

614DG

In this Part, unless the context otherwise requires—

“accountancy rental earnings” has the meaning given by section 614AB(1),

“accountancy rental excess” is to be read—for the purposes of Chapter 2, in accordance with section 614BH(1) to (4), andfor the purposes of Chapter 3, in accordance with section 614BH(1) to (4) as it has effect as a result of section 614CD,

“asset” means any form of property or rights,

“asset representing the leased asset” is to be read in accordance with section 614DD,

“cumulative accountancy rental excess” is to be read—for the purposes of Chapter 2, in accordance with section 614BH(5), andfor the purposes of Chapter 3, in accordance with section 614BH(5) as it has effect as a result of section 614CD,

“cumulative normal rental excess” is to be read—for the purposes of Chapter 2, in accordance with section 614BJ(5), andfor the purposes of Chapter 3, in accordance with section 614BJ(5) as it has effect as a result of section 614CD,

“the current lessor”, in relation to a lease of an asset, means the person who is for the time being entitled to the lessor's interest under the lease,

“finance lessor” means a person who for accounting purposes is treated, in accordance with generally accepted accounting practice, as the person with—the grantor's interest in relation to a finance lease, orthe lender's interest in relation to a loan,

“for accounting purposes” means for the purposes of—accounts of companies incorporated in any part of the United Kingdom, orconsolidated group accounts for groups all the members of which are companies so incorporated,

“lease”—in relation to land, includes an underlease, sublease, tenancy or licence, and any agreement for a lease, underlease, sublease, tenancy or licence and, in the case of land outside the United Kingdom, any interest corresponding to a lease as so defined, andin relation to any form of property or right other than land, means any kind of agreement or arrangement under which payments are made for the use of, or otherwise in respect of, an asset,and “rent” is to be read accordingly,

“the leasing arrangements”, in relation to a lease of an asset, means—the lease,any arrangements relating to or connected with the lease, andany other arrangements of which the lease forms part,and includes a reference to any of the leasing arrangements,

“the lessee”, in relation to a lease of an asset, means (except in the expression “the lessee's interest under the lease”) the person entitled to the lessee's interest under the lease,

“the lessor”, in relation to a lease of an asset, means (except in the expression “the lessor's interest under the lease”) the person entitled to the lessor's interest under the lease,

“major lump sum” is to be read in accordance with section 614BC(5),

“normal rent” is to be read in accordance with section 614AA,

“normal rental excess” is to be read—for the purposes of Chapter 2, in accordance with section 614BJ(1) to (4), andfor the purposes of Chapter 3, in accordance with section 614BJ(1) to (4) as it has effect as a result of section 614CD,

“period of account” is to be read in accordance with section 614DB(1) to (3),

“post-25 November 1996 scheme” is to be read in accordance with section 614D(1)(b),

“pre-26 November 1996 scheme” is to be read in accordance with section 614D(1)(a),

“related period of account” is to be read in accordance with section 614DB(5),

“related tax year” is to be read in accordance with section 614DB(4),

“the rental earnings”, in relation to a lease of an asset and any period, has the meaning given by section 614AC, and

“sum” includes any money or money's worth (and “pay” and related expressions are to be read accordingly).

Part 12A — Sale and lease-back etc

Chapter 1 — Payments connected with transferred land

Overview

681A

This Chapter 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, income tax relief for the payment is restricted.

Application of the Chapter

681AA

(1) Section 681AD has effect if—

(a) land, or an estate or interest in land, is transferred,

(b) the transferor, or a person associated with the transferor, becomes liable to make a payment of rent under a lease of the land or part of it, and

(2) Section 681AE has effect if—

(a) land, or an estate or interest in land, is transferred,

(b) the transferor, or a person associated with the transferor, becomes liable to make a payment of rent under a lease of the land or part of it, and

(3) The reference in subsection (1)(a) or (2)(a) to a transfer of an estate or interest in land includes a reference to any of the following—

(a) the granting of a lease or another transaction involving the creation of a new estate or interest in the land,

(b) the transfer of the lessee's interest under a lease by surrender or forfeiture of the lease, and

(c) a 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 transaction or transactions but another person becomes or ceases to be one of the owners.

(4) In relation to a transaction or series of transactions mentioned in subsection (3)(c), a person is to be regarded as a transferor for the purposes of this Chapter if the person—

(a) is an owner before the transaction or transactions, and

(b) is not the sole owner afterwards.

(5) The liability mentioned in subsection (1)(b) or (2)(b) is one resulting from—

(a) a lease, of the land or part of it, granted (at the time of the transfer or later) by the transferee to the transferor, or

(b) another transaction or series of transactions affecting the land or an estate or interest in it.

(6) The liability mentioned in subsection (1)(b) or (2)(b) is one arising at the time of the transfer or later.

(7) The reference in subsection (1)(a) or (2)(a) to a transfer does not include a transfer on or before 14 April 1964.

681AB

(1) Section 681AD has effect if—

(a) land, or an estate or interest in land, is transferred,

(b) the transferor, or a person associated with the transferor, becomes liable to make a payment which is not rent under a lease but is otherwise connected with the land or part of it (whether it is a payment under a rentcharge or under some other transaction), and

(2) Section 681AE has effect if—

(a) land, or an estate or interest in land, is transferred,

(b) the transferor, or a person associated with the transferor, becomes liable to make a payment which is not rent under a lease but is otherwise connected with the land or part of it (whether it is a payment under a rentcharge or under some other transaction), and

(3) The reference in subsection (1)(a) or (2)(a) to a transfer of an estate or interest in land includes a reference to any of the following—

(a) the granting of a lease or another transaction involving the creation of a new estate or interest in the land,

(b) the transfer of the lessee's interest under a lease by surrender or forfeiture of the lease, and

(c) a 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 transaction or transactions but another person becomes or ceases to be one of the owners.

(4) In relation to a transaction or series of transactions mentioned in subsection (3)(c), a person is to be regarded as a transferor for the purposes of this Chapter if the person—

(a) is an owner before the transaction or transactions, and

(b) is not the sole owner afterwards.

(5) The liability mentioned in subsection (1)(b) or (2)(b) is one resulting from a transaction or series of transactions affecting the land or an estate or interest in it.

(6) The liability mentioned in subsection (1)(b) or (2)(b) is one arising at the time of the transfer or later.

(7) The reference in subsection (1)(a) or (2)(a) to a transfer does not include a transfer on or before 14 April 1964.

681AC

(1) For the purposes of this Chapter each of the following is a deduction by way of relevant income tax relief—

(a) a deduction in calculating profits or losses of a trade, profession or vocation for income tax purposes,

(b) a deduction in calculating the profits of a UK property business for income tax purposes, and

(c) a deduction in calculating any loss for which relief is given under section 152 (losses from miscellaneous transactions), or in calculating profits or other income or gains chargeable to income tax under or by virtue of any provision to which section 1016 applies.

(2) For the purposes of this Chapter each of the following is a relevant deduction from earnings—

(a) a deduction under section 336 of ITEPA 2003 (expenses), and

(b) a deduction from earnings in calculating losses in an employment for income tax purposes.

Relief: restriction and carrying forward

681AD

(1) The rules in subsection (3) apply to the calculation of the deduction by way of relevant income tax relief allowed in a relevant period—

(a) for the non-excluded element of the payment within section 681AA(1) or 681AB(1), or

(b) if there are two or more such payments, for the non-excluded elements of those payments.

(2) For the purposes of this section—

(a) in relation to a deduction within section 681AC(1)(a) “relevant period” means—

(i) a period of account of the trade, profession or vocation concerned, or

(ii) if no accounts of the trade, profession or vocation are drawn up for a period, ... a tax year,

(b) in relation to a deduction within section 681AC(1)(b) or (c) “relevant period” means—

(i) a period of account of the business or person concerned, or

(ii) if no accounts of the business are drawn up for a period or the person does not draw up accounts for a period, a tax year, and

(c) the non-excluded element of a payment is the element of the payment not excluded under section 681AI (service charges etc).

(3) The rules are—

Rule 1 —meaning of amount E For any relevant period, amount E (which may be nil) is the expense or total expenses to be brought, in accordance with generally accepted accounting practice, into account in the period in respect of—the non-excluded element of the payment, orthe non-excluded elements of the payments.

Rule 2 — calculations For every relevant period—calculate the total of amount E for the period and amount E for every previous relevant period ending on or after the date of the transfer mentioned in section 681AA(1)(a) or 681AB(1)(a),calculate the total of the deductions by way of relevant income tax relief for every previous relevant period ending on or after the date of that transfer, andsubtract the total at (b) from the total at (a) to give the cumulative unrelieved expenses for the period.

Rule 3 — meaning of post-spread period A relevant period is a post-spread period if for that relevant period, and every later relevant period, there are no payments within section 681AA(1) or 681AB(1).

Rule 4 — the deduction allowed in a relevant period If a relevant period is not a post-spread period, the deduction allowed for the period is equal to the cumulative unrelieved expenses for the period, but is the commercial rent for the period if that is less (see section 681AJ or 681AK).

Rule 5 — relevant periods in which no deduction allowed If a relevant period is a post-spread period, no deduction is allowed for the period.

Certain deductions from earnings: restriction and carrying forward of relief

681AE

(1) Subsection (3) applies to the calculation of the relevant deduction from earnings allowed for the non-excluded element of the payment within section 681AA(2) or 681AB(2).

(2) For the purposes of this section the non-excluded element of a payment is the element of the payment not excluded under section 681AI (service charges etc).

(3) The deduction must not exceed the commercial rent for the period for which the payment is made (see section 681AJ or 681AK).

681AF

(1) This section applies if—

(a) section 681AE has effect, and

(b) conditions A and B are met.

(2) Condition A is that under section 681AE part of a payment which would otherwise be allowed as a relevant deduction from earnings is not allowed.

(3) Condition B is that one or more later payments are made, by the transferor or a person associated with the transferor, under—

(a) the lease (if section 681AE has effect because of section 681AA(2)), or

(b) the rentcharge or other transaction mentioned in section 681AB(2)(b) (if section 681AE has effect because of section 681AB(2)).

(4) The part of the payment mentioned in subsection (2) may be carried forward and treated for the purposes of a relevant deduction from earnings as if it were made—

(a) when the next of the later payments is made, and

(b) for the period for which that later payment is made.

(5) So far as a part of a payment carried forward under this section is not allowed as a relevant deduction from earnings, it may be carried forward again under this section.

681AG

(1) This section applies for the purposes of section 681AE.

(2) If more than one payment is made for the same period, the payments must be taken together.

(3) If payments are made for periods which overlap—

(a) the payments must be apportioned, and

(b) the apportioned payments which belong to the common part of the overlapping periods must be taken together.

(4) References in subsections (2) and (3) to payments include references to parts of payments which under section 681AF are treated as if made later than they were made.

681AH

(1) This section applies for the purposes of sections 681AE to 681AG.

(2) For the purposes of this section the relevant year, in relation to a payment, is the year which begins with the date it is made.

(3) If a payment is made for a period all of which is after the relevant year, it must be treated as made for the relevant year.

(4) If a payment is made for a period part of which is after the relevant year, it must be treated as if a corresponding part of it was made for the relevant year (and no part for a later period).

Interpretation etc

681AI

(1) This section applies for the purposes of sections 681AD and 681AE.

(2) A payment must be excluded so far as it is in respect of any of the following—

(a) services,

(b) the use of relevant assets, and

(3) The amount excluded must be just and reasonable.

(4) If a lease or agreement contains provisions fixing the payments or parts of payments which are in respect of services or the use of assets, those provisions are not conclusive.

(5) A relevant asset is any description of property or rights other than land or an interest in land.

681AJ

(1) Subsection (3) applies—

(a) for the purpose of making a comparison under rule 4 of section 681AD(3) if section 681AD has effect because of section 681AA(1), and

(b) for the purpose of making a comparison under section 681AE(3) if section 681AE has effect because of section 681AA(2).

(2) In this section “the actual lease” means the lease mentioned in section 681AA(1)(b) or (2)(b).

(3) The commercial rent is the rent which might be expected to be paid under a lease, of the land in respect of which the payment mentioned in section 681AA(1)(b) or (2)(b) is made, which—

(a) was negotiated in the open market when the actual lease was created,

(b) is of the same duration as the actual lease,

(d) provides for rent payable at uniform intervals and at an appropriate rate.

(4) Rent is payable at an appropriate rate if—

(a) it is payable at a uniform rate, or

(b) in a case where the rent payable under the actual lease is rent at a progressive rate (and such that the amount of rent payable for a year is never less than the amount payable for a previous year), it progresses by gradations proportionate to those provided by the actual lease.

681AK

(1) Subsection (2) applies—

(a) for the purpose of making a comparison under rule 4 of section 681AD(3) if section 681AD has effect because of section 681AB(1), and

(b) for the purpose of making a comparison under section 681AE(3) if section 681AE has effect because of section 681AB(2).

(2) The commercial rent is the rent which might be expected to be paid under a lease, of the land in respect of which the payment mentioned in section 681AB(1)(b) or (2)(b) is made, which—

(a) was negotiated in the open market when the rentcharge or other transaction mentioned in section 681AB(1)(b) or (2)(b) was effected,

(b) is a tenant's repairing lease, and

(3) A tenant's repairing lease is a lease where the lessee is under an obligation to maintain and repair the whole (or substantially the whole) of the premises comprised in the lease.

(4) To see whether a lease is of an appropriate duration, take the period over which payments are to be made under the rentcharge or other transaction, and—

(a) if that period is 200 years or more (or the obligation to make the payments is perpetual) an appropriate duration is 200 years, or

(b) if that period is less than 200 years, an appropriate duration is the same duration as that period.

681AL

(1) This section applies for the purposes of this Chapter.

(2) A reference to a lease includes a reference to any of the following—

(a) an underlease, sublease, tenancy or licence, and

(b) an agreement for a lease, underlease, sublease, tenancy or licence, and

(3) A reference to rent includes a reference to any payment under a lease.

(4) A reference to rent under a lease includes a reference to expenses which the tenant under the lease is treated as incurring in respect of the land subject to the lease under any of—

(a) sections 61 to 67 of ITTOIA 2005 (land occupied for trade purposes), and

(b) sections 292 to 297 of that Act (taxed leases).

(5) Expenses within subsection (4) must be treated as having been paid as soon as they were incurred.

681AM

(1) This section applies for the purposes of this Chapter.

(2) The following persons are associated with one another—

(a) the transferor in an affected transaction and the transferor in another affected transaction, if the two persons are acting in concert or if the two transactions are in any way reciprocal, and

(b) any person who is an associate of either of those associated transferors.

(3) Two or more bodies corporate are associated with one another if they participate in, or are incorporated for the purposes of, a scheme—

(a) for the reconstruction of any body or bodies corporate, or

(b) for the amalgamation of any two or more bodies corporate.

(4) Persons are associated with one another if they are associates as defined in section 681DL (relatives, settlements, persons controlling bodies, joint owners etc).

(5) In subsection (2) “affected transaction” means a transaction within—

(a) section 681AA(1) or (2) or 681AB(1) or (2), or

(b) section 835(1) or (2) or 836(1) or (2) of CTA 2010.

681AN

In the case of land outside the United Kingdom, expressions in this Chapter relating to interests in land and their disposition must be taken to relate to corresponding interests and dispositions.

Chapter 2 — New lease of land after assignment or surrender

Overview

681B

(1) This Chapter provides that in certain circumstances where a lease of land is assigned or surrendered and another lease is granted or assigned—

(a) consideration received for the assignment or surrender of the first lease is taxed as a receipt of a trade, profession or vocation or charged to income tax, and

(b) tax relief is allowed for rent under the other lease.

(2) The Chapter provides that in certain circumstances where a lease is varied it is treated as surrendered and another lease is treated as granted.

Application of the Chapter

681BA

(1) This Chapter has effect if each of conditions A to E is met.

(2) Condition A is that—

(a) a person (“L”) is a lessee of land under a lease which has 50 years or less to run (“the original lease”), and

(b) L is entitled in respect of the rent under the original lease to a deduction by way of relevant income tax relief.

(3) Condition B is that—

(a) L assigns the original lease to another person or surrenders it to L's landlord, and

(b) the consideration for the assignment or surrender would not (apart from this Chapter) be taxable except as capital in L's hands.

(4) Condition C is that—

(a) another lease (“the new lease”) is granted, or assigned, to L or a person linked to L, and

(b) the new lease is for a term of 15 years or less.

(5) Condition D is that the new lease—

(a) is of all or part of the land which was the subject of the original lease, or

(b) includes all or part of the land which was the subject of the original lease.

(6) Condition E is that neither L nor a person linked to L had, before 22 June 1971, a right enforceable at law or in equity to the grant of the new lease.

(7) If each of conditions A to D is met but condition E is not met, see the relevant provisions in Schedule 2 to CTA 2010 and Schedule 9 to TIOPA 2010.

Taxation of consideration

681BB

(1) An appropriate amount must be found under subsection (3) or (4) of—

(a) the consideration received by L for the assignment or surrender, or

(b) each instalment of the consideration (if it is paid in instalments).

(2) For the purposes of the Income Tax Acts the appropriate amount must be treated in accordance with subsections (6) to (8) and not as a capital receipt.

(3) If the term of the new lease is one year or less, the appropriate amount of the consideration or instalment is the whole of it.

(4) If the term of the new lease is more than one year, the appropriate amount of the consideration or instalment is the proportion of it found by the formula—

$16—N15$

(5) In subsection (4) N is the term of the new lease expressed in years (taking part of a year as an appropriate proportion of a year).

(6) The way the appropriate amount must be treated depends on whether the following conditions are met—

(a) the consideration is received by L in the course of a trade, profession or vocation, and

(b) the rent payable by L, or a person linked to L, under the new lease is allowable as a deduction in calculating profits or losses of a trade, profession or vocation for tax purposes.

(7) If the conditions are met the appropriate amount must be treated as a receipt of the trade, profession or vocation mentioned in subsection (6)(a).

(8) If the conditions are not met the appropriate amount must be treated as an amount chargeable to income tax.

(9) If income tax is charged under subsection (8)—

(a) it must be charged on the proportion of the appropriate amount arising in the tax year,

(b) the person liable for the tax is L, and

681BC

(1) This section applies for the purposes of section 681BB if the property which is the subject of the new lease does not include all the property which was the subject of the original lease.

(2) The consideration received by L must be treated as reduced to the portion of it found under subsection (3).

(3) The portion is that which is reasonably attributable to such part of the original property as—

(a) consists of the property which is the subject of the new lease, or

(b) is included in the property which is the subject of the new lease.

(4) The original property is the property which was the subject of the original lease.

Relief for rent under new lease

681BD

(1) This section applies if the rent under the new lease is payable by a person within the charge to income tax.

(2) This section also applies if—

(a) Chapter 2 of Part 19 of CTA 2010 (provision for corporation tax corresponding to this Chapter) has effect, and

(b) the rent under the new lease is payable by a person within the charge to income tax.

(3) The provisions of ITTOIA 2005 providing for deductions or allowances by way of income tax relief in respect of payments of rent apply in relation to the rent under the new lease.

(4) In subsection (2), and in subsection (3) as applied by subsection (2), references to the new lease and rent are to be read as in Chapter 2 of Part 19 of CTA 2010.

New lease treated as ending

681BE

(1) Sections 681BF to 681BH treat the new lease as ending in certain circumstances for the purposes of this Chapter.

(2) If any of those provisions apply in a given case, and the new lease is treated as ending on different dates, it must be treated as ending on the earlier or earliest of them.

681BF

(1) If the rent for a relevant period exceeds the rent for the following comparable period, the term of the new lease must be treated as ending on the date when the relevant period ends.

(2) For the purposes of this section—

(a) a relevant period is a rental period of the new lease ending before its fifteenth anniversary,

(b) the following comparable period (in relation to a relevant period) is the rental period which is of the same duration as the relevant period and which begins on the day following the end of the relevant period,

(d) a rental period is a period in respect of which a payment of rent is to be made, and

(e) the fifteenth anniversary of the new lease is the fifteenth anniversary of the date on which its term begins.

(3) For the purposes of this section—

(a) all rental periods of a quarter must be treated as being of the same duration, and

(b) all rental periods of a month must be treated as being of the same duration.

681BG

(1) This section applies if under the new lease the lessor, or L or a person linked to L, has power to end the lease before the end of the term for which it was granted.

(2) The term of the lease must be treated as ending on the earliest date with effect from which the lessor, or L or a person linked to L, could end the lease by exercising the power.

681BH

(1) This section applies if under the new lease L, or a person linked to L, has power to vary, in a manner beneficial to L or a person linked to L, obligations under the lease that are obligations of L or a person linked to L.

(2) The term of the lease must be treated as ending on the earliest date with effect from which L, or a person linked to L, could vary the obligations by exercising the power.

681BI

(1) Subsection (2) applies if a rentcharge payable by L, or a person linked to L, is secured on all or part of the property subject to the new lease.

(2) For the purposes of sections 681BF to 681BH the rent payable under the new lease must be treated as equal to the sum of the rentcharge and the rent payable under the lease.

Lease varied to provide for increased rent

681BJ

(1) This section applies if each of conditions A to D is met.

(2) Condition A is that—

(a) a person (“the lessee”) is a lessee of land under a lease which has 50 years or less to run (“the original lease”), and

(b) the lessee is entitled in respect of the rent under the original lease to a deduction by way of relevant income tax relief.

(3) Condition B is that (by agreement with the landlord) the lessee varies the original lease.

(4) Condition C is that under the variation—

(a) the lessee agrees to pay a rent greater than that payable under the original lease, and

(b) the lessee agrees to pay the greater rent in return for a consideration which would not (apart from this Chapter) be taxable except as capital in the lessee's hands.

(5) Condition D is that under the variation the period during which the greater rent is to be paid ends 15 years or less after the date on which—

(a) the consideration is paid to the lessee, or

(b) the last instalment of the consideration is paid to the lessee (if it is paid in instalments).

(6) If this section applies the lessee must be treated for the purposes of this Chapter—

(a) as having surrendered the original lease for the consideration mentioned in subsection (4)(b), and

(b) as having been granted a new lease for a term of 15 years or less but otherwise on the terms of the original lease varied as mentioned in subsection (3).

Interpretation

681BK

For the purposes of this Chapter each of the following is a deduction by way of relevant income tax relief—

(a) a deduction in calculating profits or losses of a trade, profession or vocation for income tax purposes,

(b) a deduction in calculating the profits of a UK property business for income tax purposes,

(c) a deduction in calculating any loss for which relief is given under section 152 (losses from miscellaneous transactions), or in calculating profits or other income or gains chargeable to income tax under or by virtue of any provision to which section 1016 applies, and

(d) a deduction from earnings allowed under section 336 of ITEPA 2003 (expenses) or allowed in calculating losses in an employment for income tax purposes.

681BL

(1) In this Chapter references to a person linked to L are to a person who is—

(a) a partner of L,

(b) an associate of L, or

(2) “Associate” must be read in accordance with section 681DL (relatives, settlements, persons controlling bodies, joint owners etc).

681BM

(1) This section applies for the purposes of this Chapter.

(2) “Lease” includes—

(a) an agreement for a lease, and

(b) any tenancy.

(3) “Lease” does not include a mortgage.

(4) A reference to a lessee or lessor—

(a) is to be read in accordance with subsections (2) and (3), and

(b) includes a reference to the successors in title of a lessee or lessor.

(5) “Rent” includes a payment by a tenant for work to maintain or repair leased premises which the lease does not require the tenant to carry out; and “premises” here includes land.

(6) In the application of this section to Scotland “mortgage” means—

(a) a standard security, or

(b) a heritable security, as defined in the Conveyancing (Scotland) Act 1924, but including a security constituted by ex facie absolute disposition or assignation.

Chapter 3 — Leased trading assets

Overview

681C

This Chapter provides that, in certain circumstances where a payment is made under a lease of a trading asset, income tax relief for the payment is restricted.

Application of the Chapter

681CA

In this Chapter a reference to a trade includes a reference to a profession or vocation.

681CB

(1) Section 681CC has effect if—

(a) condition A is met, and

(b) condition B or C is met.

(2) Condition A is that—

(a) a payment is made by a person under a lease of a relevant asset, and

(b) a deduction is allowed for the payment in calculating the profits of a trade for income tax purposes.

(3) Condition B is that—

(a) at a time before the lease's creation the asset was used for the purposes of the trade, and

(b) when it was so used it was owned by the person then carrying on the trade.

(4) Condition C is that—

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