In the current property market, it is quite common to receive an incentive to enter into a new lease.  When this takes the form of a capital contribution, the tenant receiving the payment must carefully consider the appropriate tax treatment.

IMH Advisory LLP recently worked on a fit out of an existing office building.  The tenant received a substantial capital contribution for the works.  The Agreement for Lease included provision so that the landlord received all available capital allowances.  For this part of the contribution, my client cannot claim the capital allowances. 


However where any part of the contribution is allocated to ineligible fit out works, such as internal walls and doors, the tenant is treated as receiving taxable income.  In my example, circa 10% of the contribution related to such works.  The taxable income is typically spread evenly over the length of the lease, or to the first rent review, whichever is earlier.

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