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Changes to the taxation of rent free periods and other lease incentives

A new accounting standard, FRS102 is being introduced for accounting periods commencing on or after 1 January 2015, which will change the way that lease incentives are accounted for and hence taxed.   The new rules outlined here will not apply to small companies and other entities which apply the Financial Reporting Standard for Small Entities.

Due to the way the transitional rules work it may impact on the way rent free periods and other lease incentives are taxed for leases entered into after 31 December 2013

Lease Incentives

Tenants and landlords about to commit to lease incentives should take advice to ensure they understand the potential impact on their accounts and tax position.  

Lease incentives can come in many forms ranging from simple cash sums to contributions to fit out costs or rent free periods. Typically these incentives are all taxed as they are recognised in the profit and loss account, although if they are contributions to plant or machinery the tax treatment may differ. 

Impact of FRS 102

FRS 102 will change the way that lease incentives are accounted for as the incentive will in general need to be spread over the life of the entire lease, rather than just spread over the period up to the first break clause as is the position under current UK GAAP.

For landlords, this could mean they are worse off as the tax relief for the cost of the lease incentive will be spread over a longer period. As you would expect, tenants who are taxed on the lease incentives received may be better off as the taxable income will arise over a longer period. 

For example, a landlord who provides a 6 month rent free period to a tenant with a normal annual rent of £250k on a 25 year lease with a 5 year break clause, would have claimed relief of £25k per annum for 5 years under the current UK GAAP; this will reduce to relief of only £5k per annum under FRS 102 rules, albeit for 25 years.

When Will it Take Effect?

FRS 102 is mandatory for accounting periods commencing on or after 1 January 2015, so the first accounts prepared under the new standard will be for the year ended 31 December 2015.  For companies with December year ends, their transition date is therefore 1 January 2014, being the start of the earliest period for which comparative figures will be required.  

 There are transitional rules such that leases entered into before your transitional date will continue to be accounted for under the current rules and leases entered into after the transition date will be accounted for under FRS 102. Landlords and tenants who are about to enter into a lease with a lease incentive may want to consider when their transition date will be so that they can establish whether there is any benefit to bringing forward or delaying the signing.  

For more details or to discuss please contact Zoe Roberts (zoe.roberts@bhp.co.uk)