Last updated: 16 October 2026
The question
We’ve signed a lease with a rent-free period in exchange for doing work on the building. What’s the tax position?
How rent-free periods are treated
A rent-free period is a lease incentive. Under UK accounting standards, the total rent payable over the lease is spread evenly across the lease term (or to the first break clause, depending on the standard used). So even in the months when you pay nothing, your accounts show a rent charge. Tax follows the accounts, so the deduction for rent is spread in the same way.
How the building works are treated
The tax treatment of your spending depends on what the work is:
| Type of work | Tax treatment |
| Repairs that restore the building to its previous condition | Revenue expense, deductible |
| Redecoration and like-for-like replacements | Usually deductible |
| Improvements, extensions or alterations | Capital, not deductible as an expense |
| Integral features, such as electrical, lighting, heating and lifts | Capital allowances: AIA at 100% or special rate pool |
| Other fixtures and plant, such as kitchens or security systems | Capital allowances |
Because you are a tenant who paid for the works, you can claim capital allowances on qualifying fixtures you install, even though they become part of the landlord’s property.
Example
A business takes a 10-year lease at £30,000 a year with a 12-month rent-free period, agreeing to spend £40,000 refitting the space. The total rent of £270,000 is spread over 10 years at £27,000 a year in the accounts and for tax. Of the £40,000, £15,000 is new electrical systems and lighting (integral features), £10,000 is redecoration and repairs, and £15,000 is new partition walls. The company claims AIA on the £15,000 of integral features, deducts the £10,000 of repairs, and gets no relief on the £15,000 of partitions, which are part of the building. Some partitions can qualify as plant if they are moveable.
The landlord’s side
For the landlord, a rent-free period also reduces rental income spread over the lease. Where the tenant carries out improvements in place of paying rent, the landlord may need to consider whether this is a premium or other taxable benefit. Both sides should agree the paperwork clearly.
VAT and SDLT
If the landlord has opted to tax the building, VAT is charged on rent. A rent-free period given in return for works can be a supply of services by the tenant, with VAT implications, so take advice before signing. SDLT on a new lease depends on the net present value of rent, and a rent-free period reduces this.
Tips before you sign
- Ask for a schedule of works and costs split by type.
- Agree who owns fixtures at the end of the lease.
- Check dilapidations clauses, as you may have to remove improvements later.
Frequently asked questions
Can I deduct the cost of works in the rent-free period?
Only revenue repairs. Capital works get capital allowances or no relief.
Do I spread the rent over the whole lease?
Usually over the lease term, or to the first break clause under some standards.
Can a sole trader claim AIA on fit-out costs?
Yes, the AIA covers up to £1 million a year.
Are legal fees on a new lease deductible?
For a short lease, legal fees on the grant are usually not, but renewal fees often are.
Related: capital allowances explained, fixtures and capital allowances and an asbestos roof replacement.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with commercial property and lease tax. See our small business accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 16 October 2026. It is not personal advice, so speak to an accountant about your own situation.
