HC Deb 04 August 1971 vol 822 cc316-9W
Mr. Kenneth Baker

asked the Chancellor of the Exchequer what changes he intends to make to the taxation treatment of sale and leaseback arrangements; and whether he will make a statement.

Mr. Patrick Jenkin

During the Committee stage of the Finance Bill a number of my hon. Friends expressed their concern about some recent developments in the tax treatment of payments and receipts under certain lease-back arrangements. I undertook that, as soon as possible, I would indicate the form of the legislation which I announced on 22nd June would appear in next year's Finance Bill.

I will deal first with arrangements entered into after 21st June, 1971. The legislation will be concerned primarily with cases in which an existing tenant of business premises disposes of his lease for a lump sum and the premises are then sub-leased back to the proprietor of the business at a rent which, although no greater than the present-day commercial rent, is in excess of the rent paid under the original lease. I have now decided that it will be sufficient to confine the legislation in general to cases where, assuming the arrangements to be at arm's length, the unexpired term of the original lease at the time of the lease-back transaction is for a period not exceeding 50 years and the period for which the premises are leased back to the tenant is 15 years or less. These time limits mean that the legislation will apply to fewer cases than envisaged in my statement during the Committee stage debate.

Special provisions will be necessary to deal with cases where the sub-lease, although for more than 15 years, provides for the increased rent to be concentrated wholly or mainly in the first 15 years, or less, of its term. We shall also have to deal specially with other arrangements whereby, in return for a lump sum not constituting an income receipt, increased payments come to be payable for the continued occupancy of business premises and those payments might be claimed as wholly or partly deductible in computing profits. One example would be a case in which rent under an existing lease is increased in consideration for a lump sum payment from the lessor to the lessee. Another example would be a case in which an existing lease of business premises is sold for a lump sum and the premises are sub-leased back for the unexpired term of the original lease for a premium, part of which is claimed as a trading expense. The legislation will also apply, with any necessary modifications, to all lease-back arrangements where the increased rent is claimed as a deduction or expense for tax purposes.

As I said on 22nd June, there are two possible forms the legislation might take and, before I make up my mind between them, I hope that those concerned with these matters will take advantage of the opportunity I am giving them of considering these alternatives carefully and letting me know their views on them. I should like to have them by 15th October.

Under the first alternative, the lump sum received by the vendor of the original lease would be treated as a capital sum in his hands but would be explicitly exempted from capital gains tax. The rent payable under the sub-lease, after any disallowance required by Section 491, Income and Corporation Taxes Act, 1970, would be apportioned: a proportion of each rental payment would be disallowed in such a way that the aggregate disallowance over the whole term of the sublease would equal the sum paid by the purchaser for the original lease. I shall be prepared to adopt whichever method of apportionment between income and capital would be most favourable to the taxpayer. The amount thus apportioned as capital would not, of course, be treated for tax purposes as income in the hands of the recipient.

The second alternative would declare that the lump sum paid for the purchase of the original lease is partly taxable as income; the taxable part would be computed by deducting from the lump sum 1 / 15th part of it for every year, after the first, of the term of the sub-lease. "Top-slicing" relief would be available. Under this alternative the rent under the sub-lease would be allowable as a deduction subject only to any disallowance required by Section 491. For capital gains tax purposes, the rules applied to premiums taxed under Schedule A would be applied with the appropriate adaptations.

I now turn to arrangements entered into before the 22nd June, 1971. These present a particular difficulty. On the basis of the recent decision of the Special Commissioners, the additional payments under such sub-leases would not be allowable for tax. This result, however well grounded in law, may work harshly and there is the further point that I understand an appeal against the decision is likely. Rather than have a long period of uncertainty, and to avoid any suggestion of retrospection, I propose that these cases should be dealt with on the basis that the rent will be allowable for tax and the whole of the capital sum will be regarded as within the charge to capital gains tax.