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Displaced business tenants: statutory compensation – make sure you don’t miss them!

30th Apr 2010
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By Matt Hodges

While no doubt property teams and lawyers will be very familiar with statutory compensation for displaced business tenants, it is perhaps something less well-known to the wider reader.

Why is this of interest to an accountant or tax professional?

First and foremost, the tax treatment will be of interest to the recipient of a statutory compensation payment and this can be significantly different to that of other payments made on the exit from a lease.  This is discussed in more detail later in this blog.

Secondly, and perhaps why it is necessary to consider this issue, is that typically in practice, commercial and financial teams often do not distinguish between statutory compensation and other lease payments and lease surrender payments when recording and documenting them.  This means that it is often quite hard for tax teams to properly identify them and treat accordingly.

For anyone unfamiliar with statutory compensation to displaced business tenants, what is it?

Broadly, when a lease comes to an end, under the Landlord & Tenant Act 1954, the tenant effectively has the first right to take a new lease on the premises.  Statutory compensation is payable if the landlord refuses to grant a new lease to the existing tenant on any of the following grounds:

• Tenant occupies part of the premises and landlord wants to let/sell whole building
• Landlord wants to demolish/rebuild property
• Landlord wants to occupy premises

This compensation is usually calculated as the rateable value of the property, but can be up to twice the rateable value; so, potentially, quite large sums.

So what is the tax treatment?

Essentially, the statutory compensation should be tax free in the hands of the tenant.  It is a capital receipt and, therefore, is not taxable as income.

For chargeable gains purposes, case law (in particular Drummond v Brown) has determined that the compensation does not arise from the disposal of an asset; which makes sense given that the existing lease will have expired and the tenant does not, therefore, hold any asset which it can dispose of.  Therefore, it is not chargeable as a gain.

For the landlord, the payment will be treated as capital.  To the extent that it can be argued that it was incurred in enhancing the value of the underlying asset, then it may be possible to treat it as enhancement expenditure for chargeable gains purposes.  Although, given that the tenant has not been taxed on the corresponding receipt, it is likely that HMRC may resist this position.

So, in summary, while the tax treatment may be straight-forward, it is important that the finance and tax teams are close enough to the transactions to be able to identify such payments in the first place.

Matt is a senior manager at Bourne with over ten years experience providing corporate tax compliance, reporting and advisory services to his clients, including a significant amount of his time working on M&A and structuring projects.


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