What is Lease Premium?
A lease premium is a non-refundable lump sum that is paid by the tenant (lessee) to the owner (giver) when a rental agreement is concluded. Since the lease is less than 50 years, it is classified as a short-term lease.
In the balance sheet, the premium is capitalized as a leased item and depreciated over the term of the lease. The depreciation is then added back for tax purposes. In order to calculate the actual tax-free amount, first, calculate the taxable premium of the grantor for capital gains tax using a simple formula:
Premium x 2% (duration (in years) - 1) = taxable amount to the grantor
This amount is deducted from the premium so that the taxable amount remains with the grantor's income tax as property income. This is also the tax-free allowance for the tenant, linearly over the number of rental years.
Calculating this is not as easy as it sounds. The first point is that the increase in value, not the cost of labor, is the relevant amount. The rental period must also be taken into account since the landlord only benefits from the improvements once the lease is finished and can regain possession of the property. Ultimately, this regulation only applies if the landlord would not have been able to claim a deduction from his rental income for the work done if he had done it himself, so routine repairs, for example, are not subject to charge.