Reverse premium

A reverse premium is a capital sum paid by a landlord or outgoing tenant to induce a new tenant to enter into a leasehold agreement. This differs from an ordinary premium whereby the capital sum is paid by the purchaser of a leasehold interest to the landlord or outgoing tenant.

The reasons for a reverse premium being paid could be to do with the rent on a building being above market rates, there being something undesirable about the building, or some other reason which makes the leasehold onerous in some way for the landlord or current tenant. The reverse premium acts as an incentive for the purchaser to take on the leasehold liability.

The letting of commercial properties can often involve reverse premiums. Common situations can include a developer wanting a newly-built office block to be fully let at the time they come to sell it to an investment company, or the developer of a shopping centre or entertainment complex wanting to secure an ‘anchor tenant’ (a particularly well-known brand, for example) so that other tenants will be interested in taking up leases.

The VAT and stamp duty land tax applicable to reverse premiums is complex and it is wise to obtain professional advice as each case is usually considered on its individual facts. What must be considered is whether the receipt of the reverse premium is chargeable as a trade receipt by a tenant who is granted the lease for trade, professional or vocational purposes.

If the reverse premium has been paid to enhance the value of the landlord’s interest in the property, then it will normally be deductible as being incurred expenditure. The landlord’s interest is enhanced because the rental income payable under the lease is secured.

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