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Ask Your Own Question, Chartered Certified Accountant
Category: Tax
Satisfied Customers: 5145
Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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We are landlords of several industrial warehouses one units

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We are landlords of several industrial warehouses one units lease expired and the tenant vacated the building. We prepared a schedule of delapidations the tenant did carry out the works but pride erred to agree a figure with us as compensation/ damages we settled at £120000 which they paid this amount to our solicitors, who in turn transferred the funds into our company which owns the unit. Am I correct in thinking that this payment to us is tax free also could these funds be drawn from the company tax free.
Christopher Hornsey
Hello and welcome to the site. Thank you for your question.

You are not correct in your thinking that compensation payment to your company would be tax free.

A lump sum payment to the landlord in lieu of dilapidationsi taxable in the accounts of the landlord... HMRC view on this is covered in their Property Manual PIM2020 and in summary:

- If the landlord subsequently disposes of the property, or takes occupation, he is treated as having received a capital receipt. The payment is compensation for the landlord being required to take back his property in a dilapidated condition;

- If the landlord lets the property out again, the payment is “likely to have the effect of filling a hole in the landlord’s profits” and reflects the lower rent that will have to be charged. In short, it is compensation for lost profits and is taxed as income;

- However, if the landlord himself carries out the repairs and the tenant’s payment is a contribution towards those costs, the landlord can obtain a revenue deduction, on the net cost.

More information on this can be found here

There is useful information you can find in this article here

I hope this is helpful and answers your question.

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Customer: replied 2 years ago.
if we spend the money putting the building back to its original state by carrying out the repairs ourselves is it then not taxed
Thank you for your reply.

If you spend your own money in putting the building back to its original state by carrying out repairs your selves, then the compensation goes towards reducing the overall spend.

This is what PIM2020 states under dilapidations - Alternatively, the tenant may pay a sum towards the cost to the landlord of carrying out the repairs required. In that case, the landlord should only get a deduction for the net cost he bears.

I hope this is helpful.
I thank you for accepting my answer.

Best wishes.