- Churchill Tax
Giving Up A Lease – A Tax Trap
Several years ago you signed a lease on a business premises which is now too big for your needs. The landlord has agreed that you can surrender the lease if you pay a fee. Can you claim a tax deduction for this?
Side effects
An indirect consequence of coronavirus was that many employees stopped commuting to offices and started working at home. While many have returned to the office a large minority have not. Some employers are now tied into leases requiring them to pay rent for office space they don’t need. Their landlords might agree to the early termination (surrender) of the lease but this can have tricky and sometimes undesirable tax consequences.
Deductible from income?
A general tax principle, derived from case law rather than statute, is that a business is entitled to a deduction from its income for a sum paid to release it from an “onerous liability”. In other words, the business can claim a deduction where the reason for making a payment is to reduce its costs in the long run. That suggests a payment made to persuade a landlord to accept the early surrender of a lease should be tax deductible from its income. However, that’s not the case.
Reverse premium
In this article we consider the position from the viewpoint of a tenant who pays the landlord to accept the surrender of a lease. HMRC calls this a “reverse premium”. However, in its guidance it points out that this type of reverse premium is not the same as one where the landlord pays the tenant an inducement to take on a lease. The tax rules for that type are different and not covered in this article.
TIP:
When reading HMRC’s guidance about reverse premiums make sure you know which type you’re dealing with so you don’t refer to the wrong information.
Deductible from income?
A general tax principle, derived from case law rather than statute, is that a business is entitled to a deduction from its income for a sum paid to release it from an “onerous liability”. In other words, the business can claim a deduction where the reason for making a payment is to reduce its costs in the long run. That suggests a payment made to persuade a landlord to accept the early surrender of a lease should be tax deductible from its income. However, that’s not the case.
Deductible for capital gains tax?
The principle referred to above, also based on case law, is that a payment made to release your business from an onerous liability relating to a capital asset is a capital expense. It’s only deductible for capital gains tax (CGT) purposes when working out the gain or loss when the asset is sold or transferred. While HMRC accepts this, its view is that in the case of a reverse premium for the surrender of a lease no deduction is due.
TRAP:
A payment made by a tenant to a landlord to accept the surrender of a lease isn’t tax deductible at all. If negotiating the amount of payment to surrender a lease keep in mind that the cost won’t be reduced by tax relief.
HMRC’s view
As we’ve mentioned, a payment for release from an onerous liability relating to a capital asset can only be deducted for CGT purposes. Such expenses are taken into account when working out the capital gain or loss made from selling or transferring the asset. The trouble is, the legislation only allows a deduction if the expense is “fees, commission or remuneration paid for the professional services of any surveyor or valuer, or auctioneer, or accountant, or agent or legal adviser and costs of transfer or conveyance”.
Conclusion
Payments to rid your business of an “onerous liability” are tax deductible, either from your profits or the gain or loss when you sell the asset that the payment relates to. However, a payment to get your landlord to accept the early surrender of a lease is a special case and no deduction is due. Take this into account when negotiating the amount payable.