Specialist Dental Accountants for over 28 years - Call 020 8346 0391 

He (Mac) has helped me as my practice has expanded from single-handed to a six surgery/8 dentist practice.

To read full testimonial, click here.

Capital or revenue. It's surprising that our tax system permits a deduction for keeping surplus premises on, but not for exiting them. This all comes down to the fundamental distinction between capital and revenue expenditure. Regular payments to maintain or service a capital asset are classed as revenue and allowable against your profits. Payments to acquire or dispose of a capital asset are capital and not allowable. Unfortunately, a lease can be both.

Taxman's view. You could reach an agreement with the landlord to pay him a lump sum in settlement of your ongoing liability to him. However, the Taxman's view is that the lease in question is a capital asset. Payments in connection with the disposal of such an asset are capital in nature and cannot be deducted for Income/Corporation Tax purposes, even if the lease is a wasting asset of less than 50 years. (Inland Revenue Capital Gains Tax Manual CG71263 to CG7282.)

Deductible. However, if you can't reach such a release agreement with the landlord, but merely vacate the property, an amount in respect of the future liability for rents would have to be provided for. The authority for this is Financial Reporting Standard 12 and the Herbert Smith case. So a provision for future rent payments would be tax deductible. But some discounting of the future value of the rents may be required (Inland Revenue manual BIM46550.)

Sub letting? Assuming the landlord will look for a new tenant when the property is empty, you could enter into a sub-lease of the property direct with a new tenant. The landlord may have to give permission for a sub-lease and approve the tenant. However, the landlord could be appointed as agent to find the new tenant and to manage the new tenancy. Any loss on the letting (i.e. between the rent you receive from the new tenant and the rent you still pay to the landlord) would be tax deductible.

Obligations. Have a good look at your lease, it probably says you are (amongst other things) obliged to: perform covenants, pay money, guarantee rent due from any assignee, buy the landlord's permission for doing the least thing to the property, and either give it back repaired as new or fund the work needed - even if all concerned know it is going to be demolished at once. The point is, your right to occupy emerges as merely incidental.

Paying for dilapidations. Analyse the ongoing liability for the above obligations and agree its nature in writing between you and your landlord. There are few exchanges of property where a surveyor's report doesn't include a maintenance shortfall. Unless you have done marvels of decoration and upkeep, most or all of a lump sum exit payment could emerge as dilapidations (overdue repairs), which is immediately tax deductible against your profits.

Rule of Thumb With any lump sum exit payment you should seek to agree (with your landlord) the largest possible proportion of it as settling accumulated dilapidations. The smaller the capital element the less there is at stake tax-wise.

We take great pride in our service, and would be delighted to invite you for a free 1 hour, no obligation meeting at our comfortable offices. Simply call us  on 020 8346 0391 to arrange a mutually convenient time.

This web-site was last updated on 13/06/2008

Specialist Dental Accountants for over 27 years.

Copyright © 2003-2008 Mac Kotecha & Company. All rights Reserved. The information on this site is for general guidance only. It is essential to take professional advice on specific issues about their impact on any individual or entity. No liability can be accepted for any errors or omission or for any person acting or refraining from acting on the information provided on this site.

We can still help you if you're not a dentist. Please click here