beta This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Business Income Manual

Leasing: avoidance: sale and leaseback of land: the calculation of the restriction to the allowable deduction and the carry forward of disallowed amounts

S681AD, S681AI Income Tax Act 2007, S838, S843 Corporation Tax Act 2010

There is provision for the carry-forward of disallowed amounts. This is of particular application if the profile of rent payments such that rents for early years are higher than commercial rents then taper to below commercial rents over the term of the lease. It also applies if rent is paid in advance for more than one year.

The restriction on the deduction allowable for payments within the sale and leaseback of land legislation is calculated as follows.

For Income Tax purposes, the periods mentioned in (1)-(5) below are periods of account of a trade, business or person or, where no accounts are drawn up for a period, in the case of a trade, the basis period of a tax year or, in any other case, a tax year. For Corporation Tax purposes the periods are accounting periods.

Before making the calculation, amounts must be excluded from the payments, on a just and reasonable basis, to the extent that they are in respect of services, the use of any property or rights other than land or rates usually borne by the tenant, to arrive at the amount E referred to below.

(1) For any period, amount E is the expense or total expenses to be brought into account for the period in accordance with generally accepted accounting practice in respect of the payment or payments.

(2) Calculate the total of amount E for the period and every previous period ending on or after the date of the transfer.

(3) Calculate the total of the deductions allowed for every previous period ending on or after the date of the transfer.

(4) Subtract the total at (3) above from that at (2) above.

(5) The allowable deduction is equal to the lower of the amount in (4) above and the commercial rent for the period.

If, for the period in question and every later period, there are no payments, (5) above does not apply and no deduction is allowed for the period.


Arthur sells a property to Brian and leases it back for 20 years for use in his trade.

Rent of £55,000 p.a. is payable for the first 2 years and £10 p.a. thereafter.

The commercial rent is £7,500 pa.

The rent to be allowed in Arthur’s tax computations will be:

Year Amount E for year Total of amounts E for all years to date Total deductions allowed for earlier years Difference (step 4) Commercial Rent Deduction Allowed
1 £55,000 £55,000   £55,000 £7,500 £7,500
2 £55,000 £110,000 £7,500 £102,500 £7,500 £7,500
3 £10 £110,010 £15,000 £95,010 £7,500 £7,500
4 £10 £110,020 £22,500 £87,520 £7,500 £7,500
5 £10 £110,030 £30,000 £80,030 £7,500 £7,500

and so on.