How to benefit from the tax position on rent-free periods?
Updated: Jan 25, 2021
Is there consideration?
It’s not unusual for landlords to offer a rent-free period at the start of a rental agreement or lease. Allowing a tenant to occupy the property is a supply for VAT purposes, but as long as there’s no reciprocal arrangement that could be construed as consideration you can forget about VAT.
An example of an arrangement that would count as consideration is the tenant agreeing to meet the cost of repairs to a building where that would normally be the liability of the landlord.
Granting a rent-free period should mean that you, or your company if it’s the landlord, aren’t liable to tax on the rent you waive. However, the arrangement must be properly executed, otherwise, you could remain liable to tax on it. This isn’t an issue if you personally own the property and your total rental income (from all UK properties) in the tax year in which you waive rent isn’t greater than £150,000. In that situation you’re only taxed on the rental income you receive because for tax purposes the “cash basis” of accounting applies.
Formalise the waiver
However, if you are the landlord and have elected not to use the cash basis, or your company is the landlord (and so the cash basis can’t be used), formalising the waiver is especially important because the taxable profit from your property rental business must be worked out using the accruals basis. This means that rent due but not paid counts as taxable income. Without a formal waiver, HMRC might argue that the payment of the rent could still be enforced and therefore must be treated as income.