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HMRC internal manual

Capital Gains Manual

Compensation: displaced tenants: licensed premises

1. Introduction

The guidance below considers the legislation or codes of practice applying to licensed tenancies. In particular:

  • Landlord & Tenant (Licensed Premises) Act 1990 (England and Wales)
  • Brewers’ Code

 

The guidance then considers tenancies covered by the Brewers’ Code.

In particular, the guidance considers:

  • Security of tenure
  • Right to compensation
  • Amount of compensation

 

Finally the guidance considers the computation of gains arising under the Brewers’ Code including:

  • Allowable expenditure
  • Wasting assets
  • Private residence relief

 

 

2. Landlord & Tenant (Licensed Premises) Act 1990

Under the Landlord & Tenant (Licensed Premises) Act 1990, certain tenancies of licensed premises in England and Wales were brought within the protection of the Landlord & Tenant Act 1954.

From 11 July 1992 onwards, any tenancy of licensed premises entered into after 11 September 1989 is subject to the Landlord & Tenant Act 1954 and can only be terminated in accordance with the provisions of that Act.

If compensation is received by an outgoing tenant of licensed premises in respect of such a tenancy, the case should be dealt with in accordance with the instructions at CG72328.

The guidance which follows only relate to tenancies of licensed premises not subject to the Landlord & Tenant Act 1954.

 

3. Licensed premises not protected by the 1990 act

Most licensed premises are held on annual tenancies which are renewable from year to year. For Capital Gains purposes, such a tenancy is treated as a single continuous tenancy not as a series of one-year tenancies.

 

Security of tenure

Tenants of licensed premises have no security of tenure, other than the right to the period of notice provided by the tenancy agreement (usually 12 months).

A notice to quit, giving the necessary period of notice, can be issued by the brewer at any time and for any reason.

The tenant normally has no right to compensation for the loss of the tenancy, either statutorily or under the tenancy agreement itself.

 

Brewers’ Code

However, most brewers operate under a Code of Practice which provides that displaced tenants will either be offered the tenancy of another public house or will be paid compensation.

That compensation will not be less than the amount which the tenant would have received if the tenancy had been subject to the Landlord & Tenant Act 1954. The Code of Practice does not give the tenant a legally enforceable right against the brewer.

 

Compensation payments

Before consideration is given to the Capital Gains consequences of the receipt of compensation by a displaced tenant of licensed premises, you should consider whether that compensation is chargeable to Income Tax or Corporation Tax, see BIM41800 onwards.

Compensation payments made by brewers to displaced tenants of licensed premises can include two elements:

  • a ‘basic’ element and
  • an ‘additional’ element.

 

a) ‘Basic’ element

If the tenant surrenders the tenancy at the expiry of the notice period, or surrenders voluntarily without the issue of a notice to quit, the compensation payment will usually consist entirely of the ‘basic’ element and will be outside the scope of Capital Gains.

This follows from the decision in Drummond v Brown, 58 TC 67, see CG72328.

 

b) ‘Additional’ element

If the tenant surrenders the tenancy before the expiry of the notice period, the brewer may make an ‘additional’ payment for that early surrender.

Such an additional payment will be for the surrender of the remaining term of the tenancy and will be within the scope of Capital Gains.

However, the ‘basic’ element of the compensation will still be outside the scope of Capital Gains.

 

c) Approach

As in all cases involving compensation payments, it will normally be necessary to examine the relevant documentation to determine whether the whole or part of the compensation is within the scope of Capital Gains.

If the tenant is unable to provide documentary evidence of the manner in which the compensation was calculated, a direct approach should be made to the brewery for this information.

 

4. Computation of capital gain

a) Allowable expenditure

If the whole or part of the compensation is chargeable to Capital Gains, you will need to determine whether the tenancy had a ‘cost’ which can be deducted in arriving at the gain.

It is unlikely that any actual expenditure will have been incurred in acquiring the tenancy, but if the tenancy existed at 31 March 1982 it may have had a value at that date.

Such a value would be likely to be small since such tenancies are normally non-assignable and, as noted earlier, have little security of tenure.

However, in cases where the 31 March 1982 value of the tenancy needs to be determined for rebasing and/or indexation allowance purposes, you should seek advice from the Valuation Office Agency.

 

b) Wasting asset

Any value of the tenancy at 31 March 1982 would need to be ‘wasted’ in accordance with TCGA92/Sch 8, see CG71141.

 

c) Private residence

A tenant of licensed premises will often use part of those premises as a residence.

If the whole or part of a compensation payment is chargeable to Capital Gains, the availability of private residence relief, see CG64200C, should not be overlooked.