Taxation in the United Kingdom/Legislation/Section 36 of the Income and Corporation Taxes Act 1988

Subsection (1) states that if an estate or an interest in land is sold subject to the right of reconveyance to the vendor, or someone connected with the vendor, then the following rule applies.

The vendor is deemed to have received as rental income the amount by which the price at which the estate or interest is sold exceeds the price at which it is to be reconveyed. If, however, the earliest date for the reconveyence is two or more years after the sale, this amount is reduced by one-fiftieth for each complete year, other than the first, in the period between the sale and the date of earliest reconveyance.

Subsection (2) deals with the situation where the date of reconveyance is not fixed. If the price of reconveyance changes depending on the date, it is taken to be the lowest price possible under the terms of the sale. If this rule leads to more corporation tax arising to the vendor than would have been the case had the actual date of reconveyance been fixed, the vendor has six years in which to make a claim for repayment of the additional tax.

Subsection (3) introduces a rule where the terms of the sale provide for the grant of a lease directly or indirectly out of the estate or interest of land to the vendor or a person connected with the vendor.

The rule is that the grant of the lease is treated as a reconvenyance of the estate or interest at a price equal to the premium for the lease and the value at the date of the sale of the right to receive a conveyance of the reversion immediately after the lease begins to run.

Subsection (4) disapplies subsection (3) where the lease is granted and begins to run within one month after the sale.

Subsection (4A) provides that an amount deemed to be the vendor's rental income under this section is treated as received on the date of the sale, and is taken into account when computing taxable rental income in the accounting period on which that date falls.

Subsection (4B) provides that, for these purposes, the sale happens when any of the following happen:

  • an unconditional contract for the sale is entered into;
  • a conditional contract for the sale becomes unconditional;
  • an option or right of pre-emption is exercised requiring the vendor to enter into an unconditional contract for the sale.

Subsection (5) provides that "connected with" in this section is construed in accordance with section 839 ICTA.