Lease incentives, especially where building works are to be carried out by one party or the other, can be negotiated to benefit both the landlord and the tenant.
To entice occupiers into properties in a competitive market it is not unusual for landlords to offer monetary inducements (reverse premiums) or offer rent free periods, each of which have differing tax implications.
Reverse premiums or monetary inducements typically take the form of either a straight cash inducement for the tenant to spend as they wish, or a capital contribution specific to a tenants fit out works. Reverse premiums are taxed as income by the tenant.
However it is possible to reduce the amount that the tenant is taxed where there is a capital contribution made by the landlord to the tenant, whilst also maximising the tax relief available for the landlord. The common factor is Capital Allowances.
If a tenant receives a capital contribution for works which qualify for Capital Allowances then this amount reduces the amount which is taxed as income, and is not treated as a reverse premium.
Often landlords wish to claim Capital Allowances against the expenditure they are contributing to the tenants fit out works but fail to make any specific provisions within the contribution agreement for this, other than stating x amount will be provided for the tenants fit out works.
Simple wording which specifies against what contract expenditure the money will be incurred can both maximise the amount of allowances claimed by the landlord and also reduce the amount of income received by the tenant that will be taxed.
For the landlord the contribution or reverse premium is accounted for as capital expenditure added to the base cost of the building, in effect decreasing the capital gains tax on sale.
Rent Free Periods
The effect on a tenant is that they can retain the benefit of any Capital Allowances on fit out works they may be undertaking, which is especially valuable on long leases, plus also save on the rent during the rent free period. Additionally, there is no ‘income’ to be taxed on.