October 29th, 2012 / Insight posted in

Which incentive is best for me?

NN writes: One of our shops is about to move into new premises and we have an offer from a landlord on a suitable unit. As an incentive to move into the shop, he will give us either a rent-free period or contribute to our fit-out costs along with a smaller rent-free period. Both options will amount to the same value, but is there any reason to choose one over the other?

With so many empty retail units, landlords are offering incentives to draw in new tenants. When considering which incentive to take, you should think about its impact on cashflow, accounts and taxation, writes Jon Sutcliffe, partner at Kingston Smith LLP.

Accepting a contribution to your capital spending is likely to benefit your cashflow and so be of more value than a longer rent-free period. The accounts treatment will be the same for both options. 
Both the rent-free period and the contribution to fit-out costs are incentives that should be entered into the lease agreement. The total incentive should be spread over the lease period to the first break clause in the lease. For tax purposes, the incentives are known as a reverse premium. The tax treatment will follow the accounts, except where the reverse premium is a contribution to capital spending, such as fit-out cost, that qualifies for capital allowances. In this case, the qualifying cost for capital allowances will be reduced, changing the timing of your tax relief. Whether this is of any benefit will depend on your circumstances.

Depending on the amounts involved, it is likely that the cashflow benefit of taking the contribution to fit-out costs will be most useful. However, if in doubt, ask your accountant to check how tax will affect the two choices.