Rent-free periods and tenant incentives: what commercial property managers need to get right in the accounts
A rent-free period is not free in accounting terms. For a landlord accounting for an operating lease under FRS 102, lease payments are generally recognised as income on a straight-line basis over the lease term, unless another systematic basis better represents the pattern of benefit or the permitted inflation exception applies. Rental income can therefore be recognised during months when no cash rent is received, creating accrued lease income on the balance sheet.
The revised FRS 102 is mandatory for accounting periods beginning on or after 1 January 2026. The biggest lease-accounting change is for lessees; lessor accounting remains largely unchanged.
How rent free period accounting works in practice
Take a 10-year office lease at £50,000 a year with the first 12 months rent free. Assuming the full 10 years is the lease term, total contractual rent is £450,000. Straight-line income is £45,000 a year.
| Year | Cash received | Income recognised | Accrued lease income at year end |
|---|---|---|---|
| Year 1 | £0 | £45,000 | £45,000 |
| Year 2 | £50,000 | £45,000 | £40,000 |
| Year 5 | £50,000 | £45,000 | £25,000 |
| Year 10 | £50,000 | £45,000 | £0 |
In year one, the profit and loss account records £45,000 of rental income even though no rent is collected. From year two, the accrued balance unwinds by £5,000 a year until it reaches nil.
The lease term includes rent-free periods and can also be affected by extension or termination options where the FRS 102 “reasonably certain” tests are met. The ICAEW guidance on leases under FRS 102 is a useful reference.
If your ledgers are still built around invoices rather than accounting adjustments, our guide to setting up commercial property management accounts properly explains how to structure them.
Need Expert Accounting Advice?
If you are unsure about tax, bookkeeping, payroll, property accounts or business finances, speak to the team at FHP Accounting for clear, practical guidance.
The incentives you need to account for
Rent-free periods are only one form of commercial lease incentive. Cash payments, contributions towards tenant costs and landlord-funded works can all arise, but the accounting depends on what the payment is for and who owns the resulting asset.
| Incentive | Typical landlord accounting consideration |
|---|---|
| Rent-free period | Reflect the zero-rent period within straight-line operating lease income |
| Reduced or stepped rent | Recognise lease income on the required basis; special treatment can apply for increases linked to expected general inflation |
| Cash or fit-out contribution paid to the tenant | Assess whether it is a lease incentive and reduce lease income over the lease term where applicable |
| Landlord-funded works to the landlord’s own asset | Consider whether the expenditure should be capitalised as part of the property |
| Reverse premium | Assess the accounting and tax treatment separately |
Avoid double counting in investment property values
Investment property under FRS 102 is generally measured at fair value at each reporting date, with changes recognised in profit or loss. Problems can arise if an external valuation already reflects rent-free periods or fixed rental uplifts while the accounts also carry a separate accrued-rent balance.
Reconcile the valuer’s methodology to the accounting entries so the same economic benefit is not counted twice. The required adjustment depends on how the valuation has been prepared.
From April 2028, small companies and micro-entities will have to file profit and loss accounts at Companies House, although they will be able to opt out of publishing them on the public register. Our checklist for tidying property company accounts before profit and loss filing is worth reading.
Service charges, VAT and tax during the incentive
A rent-free period does not automatically waive service charges. The lease determines whether they remain payable. Where the landlord bears a service-charge amount, it should be reflected properly in the year-end service charge statements and considered alongside the updated RICS commercial service charge code.
VAT depends on the arrangement. HMRC says that if nothing is supplied by the tenant in return for a rent-free period, no supply is made for that period. If the tenant agrees to do something in return, such as works benefiting the landlord, reciprocal supplies can arise. Where the property is opted to tax, our note on why VAT payments on account businesses should check their HMRC account is a useful reminder.
For companies, property-business profits generally start from accounts prepared under normal accounting principles, subject to tax adjustments, so the timing of rental income can affect taxable profits. Individual landlords within Making Tax Digital for Income Tax should keep digital records and submit quarterly updates where the rules apply; see our article on using a bookkeeper and accountant for MTD. If the ledgers need work, our service charge accounting guide covers the basics.
Get your lease incentives accounted for correctly
If you manage commercial property and are not confident your lease incentives are recognised or valued correctly, review them before year end. FHP Accounting offers commercial property management accounting, annual statutory accounts, VAT return services, company tax returns and advice from our property tax accountants. We also support accountants for managing agents who need help at busy periods. Contact our commercial property accountants and we’ll review your leases with you.
I lead FHP Accounting, an accountancy practice specialising in Commercial and Residential Property Accounting. Our goal is to make the administration of running property portfolios easier for landlords, managers, and investors — allowing you to focus on what you do best, while we take care of everything behind the scenes.
Need Expert Accounting Advice?
If you are unsure about tax, bookkeeping, payroll, property accounts or business finances, speak to the team at FHP Accounting for clear, practical guidance.
