A sale and leaseback is treated as two transactions: the seller disposes of the premises and makes a capital gain, then takes a new lease and pays rent. The buyer pays Stamp Duty Land Tax on the purchase, the leaseback itself is normally exempt under section 57A Finance Act 2003, and anti avoidance rules cap the seller’s rent deduction at a commercial rent and can tax part of a lump sum as income where a short leaseback follows the sale of an existing lease.
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This page covers the tax on a deal that releases cash from a building while the business stays in occupation. The accounting is covered in our guide to sale and leaseback accounting.
How is the gain on selling the premises taxed?
The sale is an ordinary disposal. A company pays corporation tax on the chargeable gain; a sole trader, partner or individual landlord pays capital gains tax. For individuals the rates for 2026 to 2027 are 18% on gains within the basic rate band and 24% above it (see capital gains tax rates). The gain is the sale price less the original cost, improvement expenditure and the incidental costs allowed by section 38 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992), such as valuers’ and legal fees.
Two timing and valuation points catch people out:
- Date of disposal. Under section 28 TCGA 1992 the disposal happens when an unconditional contract is made, not on completion. A conditional contract is a disposal when the condition is satisfied.
- Connected buyers. If the buyer is connected with the seller, for example a family member or a company or trust the seller controls, sections 17 and 18 TCGA 1992 treat the deal as not at arm’s length and substitute market value. A sale below value to a connected investor does not reduce the gain. See connected persons and tax.
Selling to your own pension scheme is a common version. HMRC’s Pensions Tax Manual (PTM121000) says the scheme must pay an arm’s length price, and any overpayment is an unauthorised payment. See SIPPs and SSASs buying commercial property.
Can the gain be rolled over into new assets?
Often, yes. Business asset rollover relief under section 152 TCGA 1992 applies where buildings occupied and used only for the trade are sold and the proceeds are reinvested in qualifying assets, which include other trading premises and fixed plant. The new assets must be acquired in the period from 12 months before to 3 years after the disposal. If only part of the proceeds is reinvested, section 153 taxes the part kept back, up to the amount of the gain.
Where an individual owns the building and their personal company (at least 5% of the voting rights) runs the trade from it, section 157 lets the individual claim. Claims are made on form HS290, and GOV.UK confirms that provisional relief is available while the reinvestment is still being planned. More detail is in our main guide to rollover relief on business assets.
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Who pays Stamp Duty Land Tax, and is the leaseback taxed too?
The buyer pays SDLT on the purchase of the freehold or long lease in the usual way. Without a relief, the seller would also be a purchaser, because taking the leaseback is acquiring a new lease. HMRC’s Stamp Duty Land Tax Manual (SDLTM16040) explains that the two legs form an exchange under section 47 Finance Act 2003, so each leg is chargeable on the greater of market value and the consideration given.
Section 57A Finance Act 2003 exempts the leaseback leg if all of these conditions are met:
- the sale is entered into wholly or partly in consideration of the leaseback;
- the only other consideration for the sale is money or the assumption, satisfaction or release of a debt;
- the sale is not a pre completion transaction within Schedule 2A; and
- where seller and buyer are both companies, they are not members of the same group for SDLT group relief at the effective date of the leaseback.
SDLTM16040 adds that the relief also covers residential property and a lease followed by an underlease back. It also makes a pricing point: if there was a written agreement for the leaseback when the sale took place, the buyer’s chargeable consideration reflects an interest already encumbered by that lease; if there was not, it relates to the unencumbered interest. The relief is claimed on the seller’s SDLT return for the leaseback.
For non residential property in England and Northern Ireland, GOV.UK gives the 2026 to 2027 rates as nil on the first £150,000, 2% on the next £100,000 and 5% above £250,000. Scotland and Wales have their own taxes with their own reliefs. See SDLT non residential rates.
How much of the rent can the seller deduct?
Rent under the leaseback is normally a deductible expense of the seller’s trade or property business. The anti avoidance rule in sections 834 to 848 Corporation Tax Act 2010 (for companies) and sections 681A to 681AN Income Tax Act 2007 (for income tax) limits the deduction to a commercial rent where property is transferred and the transferor, or an associate, becomes liable to pay rent for it. HMRC’s Business Income Manual (BIM61301) notes that no link has to be shown between the sale and the lease.
BIM61305 defines commercial rent as the rent that might be expected under a lease negotiated in the open market when the actual lease was created, of the same length, with the same repairing terms and with rent payable at uniform intervals at a level or rising (but not falling) rate.
The calculation in section 838 CTA 2010 works cumulatively. Each period, the deduction is the lower of the commercial rent and the total accounting expense since the transfer less deductions already given. Disallowed amounts carry forward, but once a period is reached in which no further payments are due, no deduction is allowed at all. BIM61315 illustrates this: a 20 year leaseback with rent of £55,000 a year for two years and £10 a year thereafter, against a commercial rent of £7,500, gives a deduction of £7,500 a year. BIM61330 confirms that the restriction affects only the tenant; the landlord is still taxed on the full rent received.
What happens when an existing lease is sold and a short lease taken back?
A separate rule in sections 849 to 862 CTA 2010 and sections 681B to 681BM ITA 2007 targets a business that assigns or surrenders its own lease for a lump sum and takes back a short lease at a higher rent. Under section 850 CTA 2010 the rule applies where the original lease has 50 years or less to run, the tenant could deduct its rent, and the new lease is for 15 years or less.
Part of the lump sum is then taxed as income rather than capital. BIM61335 explains that for a 15 year leaseback one fifteenth is income; the income share rises as the leaseback shortens, and if the new lease is for one year or less the whole sum is income. The income part is a trade receipt if the rent is deductible in a trade; otherwise it is charged as income on its own (section 851). HMRC’s example is a partnership that assigns an office lease for £200,000 and takes an 8 year leaseback: eight fifteenths, £106,666, is a receipt of the profession and £93,334 falls within capital gains tax.
Can the sale price be taxed as a premium?
Section 285 Income Tax (Trading and Other Income) Act 2005, and section 225 Corporation Tax Act 2009 for companies, can treat part of the sale price as property income where property is sold on terms that a lease will be granted back to the seller or a connected person. The Property Income Manual (PIM1226) explains the background. The charge does not apply if the lease is granted and begins to run within one month after the sale, so a normal simultaneous sale and leaseback falls outside it. The wider rules on premiums are in our guide to lease premiums and tax.
How might the numbers look?
Illustration only. A trading company sells its freehold warehouse to an unconnected investor for £1,000,000 and takes a 10 year lease back. The warehouse cost £600,000 and costs of sale are ignored for simplicity.
| Item | Effect |
|---|---|
| Chargeable gain | £400,000, taxed in the company’s accounting period that includes the contract date, unless rolled over into new trading assets |
| Buyer’s SDLT on £1,000,000 | Nil on £150,000, £2,000 on the next £100,000 and £37,500 on £750,000: £39,500 |
| Seller’s SDLT on the leaseback | Nil if the section 57A conditions are met and the relief is claimed |
| Rent of £70,000 a year where commercial rent is £75,000 | Fully deductible |
| Rent of £110,000 a year agreed to secure a higher price | Deduction capped at £75,000 a year; the excess is only relieved in a later period if rent falls below the commercial level |
What mistakes come up most often?
- Assuming the leaseback relief is automatic. It must be claimed on the SDLT return, and it is not available between companies in the same SDLT group.
- Pricing the deal with an inflated rent in exchange for a higher sale price. The capital gain rises while the rent deduction is capped.
- Taking the reinvestment window for rollover relief from completion rather than the contract date.
- Treating a lump sum for assigning a short lease as wholly capital when a leaseback of 15 years or less is taken.
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Related Accountapedia entries
- Sale and leaseback accounting
- Gifting a property to your children: the tax effects
- Relief for loss on sale of shares and property after death
- Adding a partner to your property title: tax effects
- Pension sharing on divorce: tax effects
Sources
- GOV.UK: Rates
- legislation.gov.uk: Act 1992 c. 12, section 38
- legislation.gov.uk: Act 1992 c. 12, section 28
- legislation.gov.uk: Act 1992 c. 12, section 17
- legislation.gov.uk: Act 1992 c. 12, section 18
- GOV.UK: Manual page PTM121000
- legislation.gov.uk: Act 1992 c. 12, section 152
- legislation.gov.uk: Act 1992 c. 12, section 155
- legislation.gov.uk: Act 1992 c. 12, section 153
- legislation.gov.uk: Act 1992 c. 12, section 157
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.