CG71016 - Leases: grant of lease out of short lease: restriction of capital loss

TCGA92/Sch 8/Para 6 (1)

Where:

  • a short lease is granted out of a short lease;
  • a capital loss arises; and
  • the holder of the original lease is entitled to relief under ITTOIA05/S292 or CTA09/S232, see PIM2320,

the allowable loss is restricted by the amount of the relief given under ITTOIA05/S292 or CTA09/S232.

The operation of TCGA92/Sch 8/Para 6 (1) cannot convert a loss into a chargeable gain. Where the relief given under ITTOIA05/S292 or CTA09/S232 exceeds the loss, the result is no gain/no loss.

Example

Miss P acquired a 40 year lease on a property, paying a premium of £300,000. She attempted to sub-let the property, but had difficulty in finding a tenant. Five years later she granted a 21 year sub-lease of the property for a premium of £50,000. The rent payable under the sub-lease was the same as that payable under the original lease.

The computation of the loss accruing to Miss P is as follows:

Deduction for premium paid

Prior to the grant of the sub-lease, Miss P was entitled to a deduction under ITTOIA05/S292 or CTA09/S232, see PIM2320, of £1,650 for each year.

Premium on grant of sub-lease chargeable as property income

P x [ (50 - Y) / 50 ]

P is the amount of the premium

Y is the number of complete years (other than the first) in the term of the lease

=£50,000 - [ (50 - 20) / 50 ]

= £50,000 x 0.6

=£30,000

Total deductions from the rent under ITTOIA05/S292 or CTA09/S232 over the term of the sub-lease

= £1,650 x 21 = £34,650

less £30,000 (premium received on grant of sub-lease)

= £4,650

Allowable expenditure on the grant of the sub-lease

Expenditure x [ (C - D) / P(1) ]

P (1) is the percentage derived from the table in TCGA92/Sch 8/Para 1 (6) for the duration of the lease at the beginning of the period of ownership;

C is the percentage derived from the table in TCGA92/Sch 8/Para 1 (6) for the remaining term of the lease when the sub-lease was granted;

D is the percentage derived from the table in TCGA92/Sch 8/Para 1 (6) for the remaining term of the lease when the sub-lease expires.

The percentages which are required from the table in TCGA92/Sch 8/Para 1, see CG71141, are:

P (1) - Percentage for 40 years: 95.457

C - Percentage for 35 years: 91.981

D - Percentage for 14 years: 58.971

Expenditure x [ (C - D) / P(1) ]

= £300,000 x [ (91.981 - 58.971) / 95.457 ]

= £103,744

Calculation of loss

Premium £50,000

Less allowable expenditure £103,744

(£53,744)

Add back deductions allowable

Loss (£53,744)

Plus total deductions from the rent under ITTOIA05/S292
or CTA09/S232 over the term of the sub-lease £4,650

(£49,084)

Miss P’s loss has therefore been reduced from £53,744 to £49,084.

The addition of allowable deductions cannot convert a loss to a gain. The most it can do is reduce a loss to nil.