Transitional measures applying to legacy leases

What is the VAT treatment of legacy leases?

This page explains the Value-Added Tax (VAT) implications if a tenant assigns or surrenders a lease.

What is an assignment of a lease?

It is the transfer of the lessee’s interest or part thereof to another person other than the person who holds the reversionary interest (see what is the VAT treatment of a legacy lease reversion).

What is a surrender of a lease?

It is the transfer of the lessee’s interest or part thereof to the person who at the time of the surrender retains the reversion of that interest and includes:

• the abandonment of that interest in those goods by the lessee
• the failure of the lessee to exercise any option of the kind in relation to that interest in those goods (but excluding any such failure if such interest were created on or after 1 July 2008)
• the recovery by the lessor of that interest in those goods by ejectment or forfeiture prior to the date that the interest would, but for its surrender, have expired.

Legacy leases under the new VAT on property provisions

The surrender or assignment of a legacy lease is regarded as a supply of immovable goods if it occurs:

• within a period of 20 years from the creation of the interest (the lease)
• or
• from its most recent assignment or surrender prior to 1 July 2008.

This 20 year life represents the Capital Goods Scheme (CGS) life of the legacy lease.

The question of whether a liability to VAT arises on the surrender or assignment of a legacy lease depends initially on whether or not the tenant was entitled to reclaim any of the VAT incurred on the acquisition of the legacy lease.

Tenant was entitled to reclaim VAT incurred on the acquisition of the lease

The assignment or surrender of the lease is taxable if:

• the tenant was entitled to reclaim any of the VAT charged on the acquisition of that lease or on the development of the property subject to the lease
• and
• the surrender or assignment occurs within 20 years of that tenant's acquisition of that leasehold interest.

When a tenant assigns such a lease, the new tenant to whom the lease is assigned and any further assignees will likewise be taxable on its surrender or assignment. This is in respect of the same 20 year period following that first assignor's acquisition of the interest.

Tenant was not entitled to reclaim any of the VAT incurred on the acquisition of the lease

Where the tenant was not entitled to reclaim any of the tax incurred on the acquisition of the lease, the assignment or surrender of the lease is exempt from VAT.

However, the parties to the assignment or surrender can jointly opt to have the assignment or surrender treated as taxable where both parties are taxable persons carrying on a business in the State.

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