Revenue Note for Guidance

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Revenue Note for Guidance

646 Postponement of payment of income tax to be permitted in certain cases


This section provides special treatment for cases in which property is sold subject to the condition that the purchaser will lease it back to the vendor. Many transactions of this kind would not be regarded as trading transactions, by reference to section 643 or otherwise, and there would be no question of liability to income tax in respect of any profit arising to the vendor. Such would normally be the position where, for example, the property concerned is industrial or commercial property which is occupied, or to be occupied, by the vendor.

In a case in which the question of liability arises, the situation presented is likely to be one in which a person has acquired land, erected a building on it and then disposed of the property to an insurance company or other financial institution by way of a sale-lease arrangement. In that situation, the consideration for the sale would consist partly of a sum in cash and partly of the right on the part of the vendor to obtain the lease back, and the total consideration would have to be taken into account in computing the profits chargeable.

The value of the right to the lease back largely depends on the amount of the rent payable under the lease, which initially is fixed at a percentage – say 8 per cent of the cash consideration. In a given case, the cash consideration may approximate to the market value of the property. In that event the rent under the lease back is high and, consequently, the value of the vendor’s right to that lease is small or even negligible. On the other hand, the cash consideration may be well below the market value of the property – perhaps only one-third or one-half of it. In that event, the rent under the lease-back is relatively low and the value of the right to the lease back is a relatively high proportion of the total consideration for the sale. Where, in a case of the latter kind, the vendor holds the lease back as an investment from which the vendor hopes to derive an income by letting the premises, the vendor’s liquid position may be such that insistence on immediate payment of the tax on the vendor’s development profits might cause difficulties.

Section 646 meets such a case by permitting payment, by instalments over a 10-year period, of so much of the income tax as is attributable to the value of the lease back being treated as part of the sale consideration.



(1) The term “basis period” is defined in relation to a year of assessment and means the period on the profits or gains of which income tax for that year is to be finally computed.

Conditions necessary for postponement of income tax

(2) The rules of subsections (3) and (4) apply for the year of assessment in the basis period for which the disposal of the land took place if the following conditions are satisfied —

  • a person (called the vendor) carrying on a trade of dealing in or developing land sells his/her full interest in the land in the course of the trade to a person (called the purchaser),
  • the purchaser is not connected with the vendor (this is designed to prevent abuse of the relief; normally, however, the parties to sale-lease transactions are at arm’s length, the purchaser being an insurance company or other financial institution),
  • the terms of sale provide that the purchaser will lease the land back to the vendor and the purchaser does so within 6 months from the time of the sale (the idea underlying the time limit of 6 months is that, if the lease back is bona fide intended to be held as an investment, it is taken up as soon as possible; in practice, the lease back is usually granted immediately after the sale, but the interval of 6 months provides for any delay which might reasonably occur in a particular case), and
  • the right to the lease back has a value to be taken into account in computing the vendor’s trading profit.

Postponement of income tax

(3) Where the above conditions are satisfied, and the vendor retains the leasehold interest acquired from the purchaser and has not disposed of any interest derived from that leasehold interest (for example, by the grant of a sub-lease), whether of the whole or part of the land, an amount of the tax payable by the vendor on the sale-lease transaction may be postponed. The amount of the tax to be postponed is 90 per cent of the additional tax payable as a result of including in the consideration for the disposal of the land a sum equal to the value of the right of the vendor to a leaseback of the land. (The rest of the vendor’s income tax liability is payable as normal.) The tax postponed is payable in 9 equal instalments commencing on 1 January in the year following that in which the tax would otherwise have been payable.

(4) Where a postponement of tax has been allowed, any balance of the tax which is still unpaid becomes due and payable immediately if any of the following events occurs —

  • the vendor ceases to retain the leasehold interest acquired from the purchaser,
  • the vendor disposes of an interest (for example, by the grant of a sub-lease) derived from that leasehold interest, whether of the whole or part of the land,
  • the vendor (being an individual) dies, or
  • the vendor (being a company) commences to be wound up.

Relevant Date: Finance Act 2021