Grant of lease premium
A lease premium, also called a grant of lease premium, is a lump-sum payment made by the incoming leaseholder or tenant to the landlord at the point a new lease is created, in exchange for the grant of that leasehold interest. It is separate from the ongoing rent payable under the lease once it exists. A premium is typically paid where the annual rent under the lease is nominal or below market rate, the classic example being a long residential lease of a flat (commonly 99 or 125 years) where the buyer pays a substantial premium up front and then only a peppercorn rent or modest ground rent for the term. It also arises on shorter commercial or high-value residential leases where the parties agree a premium in lieu of higher rent.
As HMRC's Property Income Manual explains, premiums received for the grant of a lease of 50 years or less are taxable on a special basis, partly as income and partly as capital, because a premium for a short lease has the economic character of rent paid in a lump sum rather than periodically. The shorter the lease, the more of the premium is treated as income.
The three lease-length thresholds
The tax treatment for the freeholder or superior landlord receiving the premium depends entirely on the length of the lease being granted:
Leases of less than 2 years. The entire premium is treated as additional rent and taxed as property business income in the year the lease is granted. No capital gains element arises.
Leases of between 2 and 50 years. The premium is split between a taxable income element and a capital element using the statutory formula in ITTOIA 2005 s.277. The income element is: Premium × (51 − N) ÷ 50, where N is the number of complete years in the lease term. The resulting income element is taxed as property business income in the year of grant; the capital element is subject to capital gains tax as a part-disposal of the landlord's interest. The shorter the lease, the larger the income element and the smaller the CGT element.
Leases of more than 50 years. The entire premium is treated as a capital receipt. The transaction is a part-disposal for CGT purposes, with no income tax charge on the premium itself. This applies to the overwhelming majority of long residential leases of flats, a 99-year or 125-year lease premium is therefore taxed purely as capital, not as income.
A worked example (2–50 year lease)
A landlord grants a 25-year lease and receives a premium of £30,000. Applying the formula: Income element = £30,000 × (51 − 25) ÷ 50 = £30,000 × 26 ÷ 50 = £15,600. This £15,600 is taxable as property business income in the year of grant. The remaining £14,400 is treated as a capital receipt and subject to CGT on disposal. HMRC's Property Income Manual PIM1205 contains further worked examples and the rules for determining effective lease duration.
SDLT for the tenant
When a tenant pays a premium to acquire a new long lease, they are liable for Stamp Duty Land Tax on that premium. SDLT on the premium is calculated using the same residential or non-residential rates that apply to freehold purchases. Where the lease also carries more than a nominal rent, SDLT is also calculated separately on the net present value (NPV) of the rent over the term of the lease, and the two amounts are added together. GOV.UK sets out the current SDLT rules for leasehold purchases, including the thresholds below which no SDLT return is required.
From working with landlords who grant long leases out of freeholds they own, August finds that the SDLT liability for the tenant, particularly on new 99-year or 125-year leases at premium prices, is often underestimated at the heads-of-terms stage, creating surprises at completion.
Grant premium vs lease extension premium
A grant premium (covered by this entry) arises when a new lease is created from scratch. A lease extension premium is a different and separately calculated payment made by an existing leaseholder when they exercise their statutory right to extend an existing lease under the Leasehold and Freehold Reform Act 2024. The two are calculated using different methodologies: the extension premium involves a valuation exercise (marriage value, relativity, and deferral calculations) rather than the income/capital split formula that applies to a new grant. Do not confuse them.
Practical note
The income element of a premium on a sub-50-year lease is taxed in full in the year of grant regardless of when payment is actually received. For landlords operating under Making Tax Digital for Income Tax (which applies to individuals with property income above the relevant threshold), this means the income element must be reported in the relevant quarterly period and settled by the year-end. The capital element is reported as part of the CGT computation for the tax year of disposal. Both the income element and the capital element require professional advice to calculate correctly where the lease includes break clauses, extension options, or connected-party arrangements, as these affect the determination of effective lease duration under the anti-avoidance rules in PIM1206 and PIM1207.
Frequently asked questions
Is a lease premium rental income or a capital receipt?
It depends on the lease length. For leases over 50 years, including standard long residential leases of 99 or 125 years, the entire premium is a capital receipt with no income tax charge. For leases of 2 to 50 years, ITTOIA 2005 s.277 splits the premium: a calculable proportion is taxed as property business income in the year of grant; the balance is a capital receipt chargeable to CGT. For leases under 2 years, the entire premium is treated as income.
Does the landlord receiving a long-lease premium pay income tax on it?
Not on the premium itself, where the lease exceeds 50 years. A 99-year or 125-year lease premium is a capital receipt: the landlord pays CGT on any gain arising on the part-disposal, not income tax. Where the lease is shorter, for example, a 25-year commercial lease granted at a premium, ITTOIA 2005 s.277 applies and part of the premium is taxable as income in the year of grant.
Does paying a premium affect the leaseholder's day-to-day landlord duties?
No. Once the lease is granted and the premium paid, the leaseholder holds the leasehold interest on the terms of the lease. If they sublet the flat to a residential tenant, they become a landlord in the full sense, subject to the Renters' Rights Act, deposit protection, safety certificates, and the PRS regulatory framework, with no reduction in those duties by virtue of having paid a premium. The premium is a transaction event, not a waiver of ongoing obligations. Where the freeholder remains above them in the ownership chain as superior landlord, both sets of obligations, leaseholder to freeholder, and landlord to subtenant, run concurrently.
