Income Tax (Earnings and Pensions) Act 2003 section 105B

Lease premiums in the case of leases with break clauses

Section 105B sets out how lease premiums are treated for the purposes of calculating the taxable benefit of employer-provided living accommodation where the lease contains one or more break clauses that could shorten it to 10 years or less.

• A "relevant break clause" is any clause that could be exercised so that the lease term becomes 10 years or less; for tax purposes, it is initially assumed that such clauses are exercised to make the lease as short as possible.
• If a relevant break clause is not in fact exercised to shorten the lease, a "notional lease" is created, running from the date the original lease would have ended (had the break been exercised) until either the next available break point or the tenth anniversary of the original lease start date, whichever is earlier.
• The net lease premium attributable to the notional lease is the premium that would have been payable for the original lease under the relevant assumptions, less any amount already used in earlier benefit calculations.
• Where the notional lease ends at the tenth anniversary of the original lease, only a proportionate share of the premium is attributed, calculated as the length of the notional lease divided by the sum of the notional lease length and the number of days the original lease would exceed 10 years if no break clause were exercised.