Is paying a tenant to leave tax deductible

Q: What does this look like in numbers?

Illustration only. Mark bought a house in 2014 for £200,000 and let it to a tenant on a long fixed term. In 2026 he pays the tenant £12,000 to surrender the tenancy so that he can sell with vacant possession, and he sells for £330,000. Ignoring buying and selling costs, his gain is £330,000 less £200,000 less £12,000, which is £118,000. The £12,000 was not deductible from his rents. If instead Mark had relet the house to a new tenant on essentially the same terms and sold it with that tenant in place years later, CG71262 indicates the £12,000 would not be allowable, because it would not be reflected in the state or nature of the property when sold. A UK residential sale with a gain usually needs a return within 60 days; see the 60 day property return.

Q: What mistakes come up most often?

Deducting the payment from rents. It is capital, following Watneys London Ltd v Pike. Confusing it with eviction costs. Legal costs of evicting an unsatisfactory tenant to relet are allowable; a payment to buy out the tenancy is not. Claiming it after reletting on the same terms. CG71262 says it is not then reflected in the property when sold. Losing the paperwork. The claim may be made many years later, so keep the surrender deed and evidence of payment. Ignoring market value rules. Surrenders between connected persons are treated as made at market value. If HMRC opens a check into your return, tax investigation insurance pays your accountant's fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

A payment to a tenant to give up possession is normally capital, so it cannot be deducted from rental income. It does not disappear, though: HMRC accepts that a landlord’s payment to procure the surrender of a lease is allowable expenditure for Capital Gains Tax under section 38(1)(b) of the Taxation of Chargeable Gains Act 1992 (TCGA), provided it is still reflected in the state or nature of the property when you sell, for example because you sell with vacant possession.

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Why is a payment to a tenant not a rental expense?

Property business profits are worked out using the trading rules, and HMRC’s Property Income Manual at PIM2005 confirms the basic principle that capital expenses cannot be deducted. The question is what the payment buys. HMRC’s Business Income Manual at BIM35545 cites Watneys London Ltd v Pike, where a brewer made ex gratia payments to tenants of its pubs to obtain vacant possession so that it could run the premises itself. The payments were held to be capital because they secured an enduring change in the way the property was exploited, even though no new asset was created.

A landlord who pays a tenant to leave is in the same position. The payment ends a tenancy that would otherwise have continued and gives the landlord something lasting: the property free of that tenancy, ready to sell, refurbish, occupy or relet on different terms. That is a capital advantage, so the payment does not go in the rental accounts.

Is it different if I just want to remove a bad tenant?

The distinction is between the cost of managing the letting and the cost of buying out the tenant’s rights. PIM2120 lists the cost of evicting an unsatisfactory tenant in order to relet the property as an allowable legal expense. Possession proceedings to recover a property from a tenant in breach, so that the property can be let again on normal terms, are part of running the business.

A cash sum paid to persuade a tenant to go is another matter. In Watneys the tenants being replaced might well have been satisfactory; what made the payments capital was that they bought out the tenancies to change how the premises were used. PIM2120 also says professional fees relating to a capital matter are capital, so solicitors’ fees for documenting a negotiated surrender follow the payment rather than the eviction rule. If you are unsure which side of the line a cost falls, see legal and professional fees for landlords.

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How does the payment reduce the gain when I sell?

Section 38(1)(b) TCGA allows expenditure incurred wholly and exclusively on the asset for the purpose of enhancing its value, being expenditure reflected in the state or nature of the asset at the time of disposal. HMRC’s Capital Gains Manual at CG71262 applies this directly: a payment by a landlord to procure the surrender of a lease qualifies as allowable expenditure under section 38(1)(b), provided it is reflected in the state or nature of the property at the date the landlord disposes of it.

CG71262 gives the obvious case where the test fails: following the surrender, the landlord grants a new lease on essentially the same terms. The property is then in the same state as before, and the payment is not allowed. CG15180 adds that expenditure which has proved futile or has wasted away before the disposal does not qualify, and that expenditure up to the actual change of ownership can count where the property is sold under contract.

In practice the payment is most clearly reflected where you sell the property with vacant possession, or where you used the vacant possession to redevelop or convert it. Keep the surrender deed, proof of payment and a note of why it was made with your capital gains records.

What does this look like in numbers?

Illustration only. Mark bought a house in 2014 for £200,000 and let it to a tenant on a long fixed term. In 2026 he pays the tenant £12,000 to surrender the tenancy so that he can sell with vacant possession, and he sells for £330,000. Ignoring buying and selling costs, his gain is £330,000 less £200,000 less £12,000, which is £118,000. The £12,000 was not deductible from his rents.

If instead Mark had relet the house to a new tenant on essentially the same terms and sold it with that tenant in place years later, CG71262 indicates the £12,000 would not be allowable, because it would not be reflected in the state or nature of the property when sold. A UK residential sale with a gain usually needs a return within 60 days; see the 60 day property return.

What if I buy back a long lease rather than a tenancy?

Where the tenant holds a lease and surrenders it to you, CG71230 explains that the surrender is both a disposal by the tenant and an acquisition by you, even though the lease normally merges with your interest and ceases to exist. Under section 43 TCGA the two interests are treated as merged, and CG71400 says the allowable expenditure on a later disposal is the sum of what you paid for each. If the lease you bought had less than 50 years to run at that point, CG71400 requires its cost to be wasted down under the short lease rules, so not all of the payment may count.

CG71230 also warns that if the surrender is between connected persons, or not at arm’s length, the disposal and acquisition are treated as made at market value. Paying a relative or your own company to give up a lease therefore needs a proper valuation.

How is the payment treated for the tenant and for VAT?

For the tenant, the surrender is a disposal of their lease (CG71230). CG72300 explains that compensation to displaced tenants is first tested for income tax, then for capital gains, and that some statutory compensation has been held exempt because it does not derive from an asset. The tenant’s position is covered in surrendering a lease.

For VAT, VAT Notice 742 paragraph 10.3 says that if you pay a tenant or licensee to surrender an interest, right or licence, that is a supply by the tenant to you, generally exempt unless the tenant has opted to tax. This usually only arises with commercial premises; see VAT on lease surrenders.

Is it different for property developers?

Yes. This page deals with investment landlords. PIM4300 describes a buyer who acquires a block of flats and buys out the tenants over a period with a view to selling the whole block, and explains that the expenses of flats no longer intended to be let leave the property business and can only be deducted in computing the property dealing profit. Where property is trading stock, payments connected with it are considered in the dealing trade rather than under the capital gains rules above. Whether you are a dealer or an investor is explained in property developer or investor.

What mistakes come up most often?

Deducting the payment from rents. It is capital, following Watneys London Ltd v Pike.
Confusing it with eviction costs. Legal costs of evicting an unsatisfactory tenant to relet are allowable; a payment to buy out the tenancy is not.
Claiming it after reletting on the same terms. CG71262 says it is not then reflected in the property when sold.
Losing the paperwork. The claim may be made many years later, so keep the surrender deed and evidence of payment.
Ignoring market value rules. Surrenders between connected persons are treated as made at market value.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

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Sources

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.