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Tax implications on the surrender and re-grant of a lease


There may be a variety of reasons why a landlord and/or tenant may want to undertake a surrender and re-grant of a lease. The parties may wish to update the covenants to which each is bound, or to put the lease onto a surer footing by extending the term. Further, in farming or agricultural contexts, it may be preferable for the parties that the lease qualifies as a farm business tenancy under the Agricultural Tenancies Act 1995 (or an agricultural holding under the Agricultural Holdings Act 1986) and enables them to agree more specific terms relating to their legal relationship. In such situations, the parties will often enter into an express agreement to bring to an end to the existing lease and immediately replace it with a new lease.

Aside from the commercial implications, there are a number of tax issues which must be borne in mind when considering such an express surrender and re-grant of a tenancy. This article discusses those tax issues in brief (and for completeness, the article focuses on express surrenders and re-grants rather than the transactions which could amount in law to a surrender and re-grant of a lease, such as a variation to increase  the demised area under a lease).

Stamp Duty Land Tax (SDLT):

A surrender and re-grant involves two acquisitions for SDLT.  Firstly, the landlord makes an acquisition on the surrender as the freehold is enlarged, and secondly the tenant makes a different acquisition when it is granted the replacement lease in the usual way. For SDLT, a surrender and re-grant is therefore a land exchange.

The SDLT rules on land exchanges (where one of the limbs of the exchange is a major interest such as a freehold transfer or the grant of a lease) are ostensibly very punitive: SDLT is payable by reference to the market value of the interests passing (if the actual chargeable consideration provided is less than the market value – which it often will be). So, the landlord and tenant can both face a market value charge to SDLT even where little if any actual cash passes between them.

A measure of relief is however available provided that the new lease is granted in consideration of the surrender of the existing lease and the surrender and grant are between the same parties (it is prudent to specifically state this in the documentation). If so, the market value rule is switched off and SDLT is only payable by reference to any other chargeable consideration provided (for example, if one party pays the other a cash sum). Overlap relief on rent under the new lease may also be available.

Care must be taken to ensure that the parties to the re-grant are indeed the same as to the surrender (for example, specific SDLT rules apply where a nominee is involved). Similarly, where the parties are connected and one of them is a company, that company can also face a possible market value charge to SDLT, notwithstanding the above relief.


VAT on a surrender and re-grant can be far more complex than meets the eye.  As above, since land transfers are made between the same persons in opposite directions, there arises a barter transaction for VAT (as a supply is ‘paid for’ otherwise than in cash).  Whether VAT actually arises, however depends on whether the landlord and tenant have opted to tax their interests.

A barter is complex as it requires a subjective valuation of the consideration received. So, upon the landlord’s acquisition, the question is what would the landlord subjectively decide to pay the tenant for the surrender if the landlord chose to pay cash (and not to grant the replacement lease)?  If the tenant has opted to tax their interest for VAT, the landlord needs to account to the tenant for VAT on this subjective amount. The reverse analysis broadly applies on the re-grant.

Generally, the value of the supplies for VAT will be of equal value, but not always. It also goes without saying that where cash is also paid (for example cash paid to a tenant on the surrender element), VAT would also be due on that part of the consideration. So, for example, if a lease reversion is worth £1m and the landlord pays the tenant £100k and grants a new lease of broadly the same terms, the landlord is required to account for VAT of £20k in relation to the cash payment and £200k in relation to the value of the surrender.

Often, the actual accounting for VAT can be simplified by using VAT-only invoices.  So, where no cash changes hands on the surrender and re-grant, the parties can give each other a VAT invoice as if they had made a supply with an amount of VAT due. While the invoice records the amount of VAT arising, there can be a set-off such that there doesn’t need to be an actual payment of cash representing VAT from one party to the other and then vice versa.

The VAT analysis on surrenders and re-grants can be very complex and it is essential that each party (and their accountants) understands their obligations at the outset.

Capital allowances:

Where a property contains fixtures on which a tenant has claimed capital allowances, the surrender of a lease of the property by a tenant for cash consideration counts as a ‘sale’, such that a landlord may be able to claim capital allowances on the portion of the payment that is attributable to those fixtures at the property. The parties would be able to agree this apportionment using an election.

However, on a surrender and re-grant, the re-granted lease is treated as the same qualifying interest which the tenant held (i.e. the original lease), so that the tenant is not treated as having made a disposal for capital allowance purposes. This means the tenant can continue to claim allowances as normal and there does not need to be any apportionment.

Inheritance Tax (IHT):

A typical surrender and re-grant scenario will not generally give rise to any IHT implications unless there is a transfer of value pursuant to section 3 Inheritance Tax Act 1984.

There will often be situations where there is a clear transfer of value, such as a surrender for no consideration where there have been no commercial negotiations. A transfer of value may also arise where the tenant and landlord are connected to each other, for instance under the “close companies” provisions of the IHT legislation.

Each case will turn on its own specific facts, so it is important to take proper advice from the outset.

Capital Gains Tax (CGT):

CGT arising on a surrender and re-grant is generally a more complex area.  Where a party to the transaction is a limited company, it is corporation tax rather than CGT which will apply.

For the landlord, the re-grant will usually amount to a part disposal of the freehold of the property out of which the new lease is granted. The landlord’s position will depend also on whether they receive a premium from the tenant or whether the circumstances are such that a notional premium may be imputed.

A surrender is usually considered to be a disposal by the tenant for CGT purposes. Generally, the consideration for the surrender will be the value of the new lease granted by the landlord in addition to any consideration actually provided. However, this will not necessarily be the case where the parties are connected, or the transaction is not on an arm’s length basis.

Where there is a disposal, whether there is CGT to pay will depend upon whether there is a chargeable gain. This will be a question of valuation in each case. Certain reliefs may also be available to mitigate any tax liability.

The tenant can often rely on HMRC’s Extra Statutory Concession D39. Where the five conditions set out in the Concession are met, the surrender by the tenant will not be regarded as a disposal. The five conditions are as follows:

  • The transaction, whether made between connected or unconnected parties, is made on terms equivalent to those that would have been made between unconnected parties bargaining at arm’s length;
  • The transaction is not part of, or connected with, a larger scheme or series of transactions;
  • A capital sum is not received by the tenant;
  • The extent of the property in which the tenant has an interest under the new lease is the same as that under the old lease; and
  • The terms of the new lease (other than its duration and the amount of rent payable) do not differ from those of the old lease. Trivial differences are ignored.

In addition to these conditions, the Concession will only apply where the new lease extends the term of the previous lease, as opposed to the demised property.

Again, a case by case analysis of how the CGT rules apply to the specific facts is key.

Overall, a number of complex tax issues can arise on a seemingly straightforward surrender and re-grant, particularly where the parties involved are connected, the land in question is opted to tax or where one of them is a company. If you have any questions on the matters raised in this article, please contact Nerys Thomas or Anthony Reeves.

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