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This publication is available at https://www.gov.uk/government/publications/land-and-leases-the-valuation-of-land-and-capital-gains-tax-hs292-self-assessment-helpsheet/hs292-land-and-leases-the-valuation-of-land-and-capital-gains-tax-2020
This helpsheet explains how certain disposals of land, including leases, are treated for Capital Gains Tax (CGT). But it’s only an introduction. If you’re in any doubt about your circumstances you should ask your tax adviser. The Capital Gains Tax Manual, explains the rules in more detail.
This helpsheet will help you fill in the Capital Gains Tax summary pages of your tax return.
Your Capital Gains Tax liability
If you dispose of land or any interest in land, you may make a chargeable gain or an allowable loss. The calculation of the gain or loss arising on a disposal is in many cases the same as for other assets, but there are some special rules which apply only to land.
From 6 April 2015 if you sell (or dispose of) the whole or part of an interest in UK residential property when non-resident, you must tell HMRC within 30 days of conveyance and you may have to pay CGT for non-residents: UK residential property on any gains you make.
This is only a summary of the main provisions.
Grant of lease
The grant of a lease, whether out of a freehold or leasehold interest, is a part disposal. In certain circumstances, you may also be chargeable to Income Tax. Grants of leases fall into 3 categories, the grant of a:
- long lease out of a freehold or long leasehold interest
- short lease out of a:
- freehold or long leasehold interest
- short leasehold interest
The tax treatment is different for each category. A long lease is one with more than 50 years duration remaining and a short lease has 50 years or less remaining. The duration of a lease for CGT purposes will normally be the time remaining until the expiry of the current term of the lease, but can also be affected by any provision in the lease allowing the landlord or the tenant to give notice to terminate the lease, or by a provision allowing the tenant to extend it.
Grant of a long lease out of a freehold or long leasehold interest
To calculate the gain arising on the part disposal, any allowable expenditure (apart from the costs of disposal) is apportioned between the freehold reversion or superior leasehold interest retained and the lease granted. This is done by applying the fraction A ÷ (A + B) to the allowable expenditure, as for part disposals of other assets, but with one difference.
For the granting of a lease:
- A is the premium or consideration received for the grant of the lease
- B is the value of the interest retained which includes the value of the right to receive the rent due under the lease
On 30 June 1988, Mr Jones bought the freehold of a property for £150,000. On 30 June 2019, he granted a 75-year lease of the property for a premium of £200,000. Rent of £5,000 a year was due under the lease. Mr Jones incurred legal fees of £3,000 on the grant of the lease.
The value of the interest retained is the freehold subject to the lease and at 30 June 2019 this was valued at £100,000.
|Mr Jones’ allowable expenditure is:|
|£150,000 (cost of property) × A ÷ (A + B)|
|£150,000 × £200,000 ÷ (£200,000 + £100,000) =||£100,000|
|The gain accruing to Mr Jones is then calculated as follows:|
|Minus apportioned cost (as above)||£100,000|
Grant of a short lease out of a freehold or long leasehold interest
Part of any premium you may receive for the grant of a short lease is chargeable to Income Tax. See page UKPN 6 (box 22) of the UK property notes for more details. The calculation is made as for the grant of a long lease (see above), except that the amount chargeable to Income Tax is:
- left out of the:
- consideration brought into the calculation of the gain or loss arising
- numerator A in the A ÷ (A + B) fraction used to apportion the allowable cost between the freehold or superior leasehold interest retained and the lease granted, but
- included in A in the denominator of the A ÷ (A + B) fraction
On 6 April 1986 Miss Smith bought a freehold property for £45,000. On 6 April 2019 she granted a 46-year lease for a premium of £35,000 and a rent of £2,000 a year. The value of the freehold subject to the lease was £50,000.
|The amount chargeable to Income Tax is:|
|£35,000 minus (£35,000 × 45) ÷ 50 =||£3,500|
|The consideration for CGT is:|
|Minus amount chargeable to Income Tax||£3,500|
|Consideration for CGT purposes||£31,500|
Allowable expenditure – applying the part disposal formula
|£45,000 × £31,500 ÷ (£35,000 + £50,000) =||£16,677|
Note that the A factor (in the fraction A ÷ (A = B)) (see above) in the numerator is the consideration for CGT purposes; the A factor in the denominator is the entire premium.
|The chargeable gain is then:|
|Minus allowable expenditure||£16,677|
Grant of a short lease out of a short leasehold interest
Part of any premium you may receive for the grant of a short lease is chargeable to Income Tax. See page UKPN 6 (box 22) of the UK property notes for further details. In calculating the amount chargeable to CGT:
- the full amount of any premium payable for the granting of the lease is brought into the calculation of the gain or loss as the consideration received, but a deduction of the amount chargeable to Income Tax is made later in the calculation
- special rules apply for calculating the allowable expenditure to be deducted from the consideration in calculating the gain or loss
- if a capital loss arises, it may be restricted in some circumstances
HMRC will let you have the details necessary to calculate your chargeable gain or allowable loss.
Other sums received after you grant a lease
During the existence of a lease you may receive a capital sum in exchange for the surrender of the lease, or instead of rent, or for the variation or waiver of some of the terms of the lease. Such a capital sum is chargeable to CGT. To find out how to calculate your chargeable gain or allowable loss, ask HMRC advice on Self Assessment or your tax adviser.
Assignment or surrender of a lease
If you have assigned or surrendered a lease, you have made a complete disposal of that leasehold interest. The amount of your gain or loss depends on whether the lease was a long lease or a short lease at the date of disposal.
A long lease is one with more than 50 years duration remaining, and a short lease has 50 years or less remaining. The duration of a lease for CGT purposes will normally be the time remaining until the expiry of the current term of the lease, but can also be affected by any provision in the lease allowing the landlord or the tenant to give notice to terminate the lease, or by a provision allowing the tenant to extend it.
For a long lease, any allowable expenditure is allowed in calculating the gain or loss in the normal way. For a short lease, the allowable expenditure is restricted and special rules apply. To find out how to calculate your taxable gain or allowable loss, ask HMRC advice on Self Assessment or your tax adviser.
If your land is compulsorily purchased, you are subject to CGT in the normal way, but there are some special rules. These:
- determine the date of disposal
- provide for some small disposals not to be treated as a disposal
- allow for any gain arising to be rolled over against the acquisition of new land in certain circumstances
- provide for an apportionment of the compensation between its constituent factors
Date of disposal
Where land is acquired by an authority exercising compulsory powers, the date of disposal is the time at which the compensation for the acquisition is agreed, or otherwise determined. Any variation on appeal is ignored for the purpose of determining the date of disposal.
Small part disposals
Where the land compulsorily acquired is only part of a larger holding of land, and the following conditions are satisfied, you can claim that the compensation received should not be regarded as a disposal, but that it should instead be deducted from the allowable expenditure on the entire holding. On a later disposal, or part disposal, of the remainder of the holding, only the reduced expenditure is taken into account in calculating any subsequent gain or loss. The conditions are:
- the holding is not a wasting asset – for land this usually means that the land is not held under a lease with 50 years or less still to run
- the market value of the land is small, compared to the value of the entire holding – a holding for this purpose does not necessarily comprise the whole of your estate, but means the smallest unit of land with a separately identifiable cost, which includes all of the land compulsorily acquired
- you must have taken no steps to make it known, by advertising or otherwise, that you were prepared to sell any part of the holding
The freehold of an area of land was purchased at a cost of £200,000 in 1999. A small strip of the land is acquired by compulsory purchase for £8,000 in 2003. A claim is made for the disposal to be disregarded. The remaining land is sold for £250,000 in 2019. There’s no gain or loss on receipt of the compensation and the chargeable gain on the sale in 2019 is:
|Minus original cost||£200,000|
If you want to claim this relief in the Capital Gains Tax summary pages of your tax return, enter code ‘OTH’ in box 8, 20 or 28 and provide details of the claim in the ‘Any other information’ box, box 54, or in your computations, providing a clear statement that this relief is being claimed.
Compensation used to acquire new land
If you apply the compensation you received, for land compulsorily acquired, in acquiring new land, you may claim to roll-over the gain you make against the cost of the new land. In that case, the compulsory purchase is treated as giving rise to neither a gain nor a loss, and the cost of the new land is reduced by the amount of the gain which would otherwise have arisen.
The 2 main conditions which have to be met are:
- you must have taken no steps to make it known, by advertising or otherwise, that you were prepared to sell any part of the holding
- the new land cannot include a dwelling house that is or may become your only or main residence
If the new land will become a wasting asset within 10 years (typically a lease which on acquisition has 60 years or less to run), the rules are modified. They’re also modified where only part of the compensation is applied in acquiring the new land. If you need more details, ask us or your tax adviser.
If you want to claim this relief in the Capital Gains Tax summary pages of your tax return, enter code ‘ROR’ in box 8, 20 or 28 and provide details of the claim in the ‘Any other information’ box, box 54, or in your computations, providing a clear statement that you’re claiming this relief. You can do this by completing the form attached to Helpsheet 290 Business Asset Roll-over Relief and sending it to HMRC with your tax return.
Mrs Davies bought some land for £50,000 in April 1991. It is compulsorily purchased for agreed compensation of £80,000. The date of disposal is May 2019. The compensation is used to buy more land costing £100,000 and she claims that the gain should be rolled over.
|The gain is:|
|The gain is reduced by the roll-over to zero and the allowable cost of the new land becomes:|
|Minus gain rolled over||£30,000|
Apportionment of compensation
In law, compensation for compulsory purchase is a single sum but for tax purposes it’s apportioned between its constituent factors, and is taxable accordingly. The categories for which compensation may be received are for:
- the land itself
- severance or injurious affection
Compensation for disturbance may include several items and the tax treatment varies accordingly. The most common elements are dealt with as follows:
- compensation for:
- losses on stock and loss of profits is taxable as income
- loss of goodwill is chargeable to CGT
- expenses is set against those expenses
- any remaining amounts are chargeable to CGT if they derive from chargeable assets
Compensation for severance or injurious affection is paid for a fall in the value of land you retained caused by the compulsory purchase. This is treated as giving rise to a part disposal of the retained land concerned. Any resulting gain or loss is calculated in the normal way, subject to the rules for small part disposals referred to above.
Part disposals – alternative basis of calculation
Where part of a holding of land is disposed of, it’s necessary to apportion the allowable cost of the land, and any other allowable expenditure, between the land sold and the land retained in order to calculate the gain or loss arising. The statutory rules for doing this require a valuation of the land retained. In order to avoid the need for this, HMRC will usually accept an alternative basis of apportioning the expenditure.
Under the alternative basis, the land disposed of is treated as a separate asset from the land retained and any fair and reasonable method of apportioning part of the allowable expenditure to it will be accepted. HMRC may insist on the statutory rules if it’s not satisfied that the resulting apportionments are fair and reasonable.
Part of a holding in land which was acquired in 1975 is sold in May 2019 for £50,000. The market value at 31 March 1982 of that part was £20,000. The costs of disposal were £2,000.
|The gain using the alternative basis is:|
|Minus market value at 31 March 1982||£20,000|
|Costs of disposal||£2,000||£22,000|
If the alternative basis is not used it would be necessary both to value the whole property at 31 March 1982 and to value the whole of the land retained at the date of the sale.
Small part disposals
To determine the cost of the land retained, the cost of the part disposed of is deducted from the total cost. Once the statutory rules have been applied to a part disposal of a holding of land, they also have to be applied to subsequent disposals.
Where you have disposed of part of a holding of land you may, if certain conditions are met, claim that it should not be regarded as a disposal and that the consideration you have received should instead be deducted from the allowable cost of the rest of the holding. On a later disposal, or part disposal, of the remainder of the holding, only the reduced expenditure is taken into account in calculating any subsequent gain or loss. The main conditions, which must all be met, are the:
- amount or value of the disposal does not exceed:
- 20% of the market value of the holding
- total amount or value of all disposals of land you have made in the year does not exceed £20,000
- holding of land must not be a wasting asset (a typical example of land which is a wasting asset is a lease with 50 years or less to run)
If you wish to claim this relief in the Capital Gains Tax summary pages of your tax return, enter code ‘OTH’ in box 8, 20 or 28 and provide details of the claim in the ‘Any other information’ box, box 54, or in your computations, providing a clear statement that you’re claiming this relief.
Valuations of land
You may need a valuation to calculate the gain or loss arising when you dispose of an interest in land. The main circumstances where this will be so are where either:
- the land was owned at 31 March 1982
- the disposal is not by way of a bargain at arm’s length
- the disposal is to a person with whom you’re connected
- there has been a disposal of part of a holding of land and the alternative basis for calculating the allowable cost (see above) is not being used
If you have used any valuation to calculate any gain or loss, in the Capital Gains Tax summary pages, put ‘X’ in box 53 and provide details of the valuation in the ‘Any other information’ box, box 54, or in your computations, whether you have prepared your own estimate of the value, or have taken professional advice.
If you have already asked for form CG34 Post-transaction valuation checks for capital gains to check any of the valuations you have used in your calculations, put a note to that effect in the ‘Any other information’ box, box 54, or in your computations.
In each case your valuation must be of the asset you owned as it was at the date of valuation. This can affect the basis of valuation and some of the more common examples are explained below.
Valuation at 31 March 1982
Your valuation should not be on a like-for-like basis. If the land has been substantially altered since 31 March 1982, for example, by further building work, the valuation must nevertheless be of the land in the state that it was in at 31 March 1982.
Similarly, you may dispose of a property with vacant possession but if it was occupied by tenants at 31 March 1982, it must be valued taking account of the tenancies. The opposite applies if the property was sold with tenants in occupation; it should still be valued with vacant possession at 31 March 1982, if it was in fact vacant at that date.
If you own land with one or more other persons, any valuation will need to take account of this. The valuation has to be of your interest, which in this case is an undivided share in the property. In view of the difficulties inherent in selling such a share, this will normally mean that the value is less than a proportionate share of the value of the entire property. Thus for a property which is equally owned by 2 people, the valuation for each of them would normally be less than one half of the value of the entire property.
Post transaction valuation checks
If you need to provide any valuations, HMRC offer a free service to help you complete your tax return. You can ask HMRC to check your valuations before you make your tax return. You’ll need to complete a form CG34 for each valuation you want checked. The notes attached to form CG34 give more information about the service.
If you beneficially own buildings or structures that you have used in a qualifying activity then you may have claimed Structures and Buildings Allowance (SBA). When you make a disposal of that land then you need to take account of the SBA claimed in working out your gain or loss. You do not need to take account of SBA where:
- the transfer is treated as giving rise to neither a gain nor a loss, for example transfers between spouses
- you make the transfer when incorporating your business so that incorporation relief applies, see Incorporation Relief (Self Assessment helpsheet HS276)
SBA is given in respect of the qualifying buildings and structures but not the land itself. However for CGT purposes the land and the buildings or structures situated on that land are a single asset. This means the CGT position differs depending on your type of interest in the land.
Disposals of freehold land that includes a qualifying building or structure
The amount of SBA actually claimed is added to the consideration. If there are any changes required to the consideration, for example if it is replaced with market value, then these changes are made before the SBA is added to the consideration.
A property investor builds an office block for £100 million and claims SBA for 5 years, receiving total relief of £10 million as a deduction in calculating the profits of the property business. The property is then sold for £120 million.
Without any claim for SBA, the calculation would be consideration received (£120 million) less CG base cost (£100 million) to give a capital gain of £20 million. However, relief, in the form of SBA, has already been provided for £10 million of the cost, so the CGT computation becomes:
|Consideration received plus SBA claimed (120 million + £10 million)||£130 million|
|Less CGT base cost||(£100 million)|
|Chargeable gain||£30 million|
If you hold the freehold of land including a qualifying building or structure that you paid for and then you grant a lease of 35 years or more, the lessee will receive SBA. When you make any future disposal, such as granting another lease or selling the freehold of the land, your costs for the qualifying building or structure will be reduced by the amount of SBA given to the lessee.
Disposals of leased land that includes a qualifying building or structure
Under CGT rules short leases (leases for 50 years or less) are classed as wasting assets. However, where capital allowances (including SBA) are claimed then the lease is not treated as a wasting asset. If the asset partially qualifies for SBA and partially does not, an apportionment must be made.
If a lessor has constructed a building and leases it for a period less than 35 years, the lessor can claim SBA on the cost and the lessee cannot claim SBA. In this situation the lessee is not entitled to any capital allowances on the cost so any capital cost incurred by the lessee to obtain the lease will be wasted as normal.
In situations where the lessor has constructed the building but the lessee claims SBA (that is, the lease is longer than 35 years and the market value of the retained interest is less than one third of the capital sum paid for the interest) and the lessee holds onto the building for the duration of the lease, SBA claimed is treated as consideration in the CGT calculation. The value of the lease will have been wasted down to nil if the lease term expires.
If the lessee holds a lease until its natural end then there will be a deemed disposal of the lease when it ends. Where the lessee incurs SBA qualifying expenditure, the CGT computation will result in a capital loss in respect of any qualifying expenditure not relieved by SBA.
Where the lessee disposes of the lease mid-term, the SBA claimed is added to disposal proceeds, but wasted on the same basis that the acquisition cost is wasted. Any subsequent lessee is entitled to claim any remaining SBA up to the expiration of the lease.
A person may lease land then incur expenditure to construct a building or structure that qualifies for SBA, subsequently disposing of the lease, which includes the building or structure constructed on the land. In this case, an apportionment of the disposal value must be made, so that the relevant proportion can be attributed to the land (which has not qualified for SBA) and the building (which has qualified for SBA). Two separate calculations will then need to be made to compute the chargeable gains for the land and building separately. For the calculation of the chargeable gain for the building, the amount of SBA claimed in relation to the building is added to the apportioned consideration received.
A company leases bare land for 80 years, paying a capital premium of £20 million. The company builds, at its own expense, a factory on the land for £100 million, all of which qualifies for SBA. The company claims SBA for 40 years, receiving total relief of £80 million as a deduction in calculating the profits of the company. The company then disposes of the lease of the land and building to a third party for a combined total of £60 million.
Step 1: apportionment of expenditure by reference to capital allowances.
Total expenditure = £20 million + £100 million = £120 million
(Capital cost of bare land lease plus capital cost to build factory)
Expenditure on which capital allowances (SBA) have been given = £80 million
Expenditure on which capital allowances have not been given = £40 million
Step 2: apportionment of consideration in the same proportions.
Total consideration = £60 million
Apportionment of consideration:
Building = £60 million × 80 million ÷ 120 million = £40 million
Land = £60 million less 40 million = £20 million
|Step 3a: CG computation for building|
|Consideration received plus SBA claimed (£40 million + £80 million)||£120 million|
|Less apportioned cost||(£80 million)|
|Chargeable gain||£40 million|
|Step 3b: CG computation for land|
|Less wasted apportioned cost £40 million × (100 - 95.457) ÷ 100||(£38.2 million)|
When a qualifying building or structure is demolished
- hold a leasehold interest in the land including the qualifying building or structure
- claimed SBA for that qualifying building or structure
then the demolition of the qualifying building or structure is treated as a disposal of that qualifying building or structure (but not the land itself). The amount of SBA claimed must be added to consideration received on disposal (which will usually be £nil in the case of demolition). You will normally have a loss if you have not received SBA for the full cost of the qualifying building or structure.
A company leases bare land for 40 years. The company builds, at its own expense, a power plant on the land for £100 million and claims SBA for 40 years, receiving total relief of £80 million as a deduction in calculating the profits of the company. The power plant is then demolished at the end of the 40 year lease.
|Consideration received plus SBA claimed (£0 + £80 million)||£80 million|
|Less cost of power plant||(£100 million)|
You can make an election for this treatment not to apply. The election needs to be made in writing on or before the first anniversary of 31 January following the year of assessment in which the demolition occurred. For a demolition taking place in the period 6 April 2019 to 5 April 2020 the election must be made by 31 January 2022. Any such election is irrevocable.
You can make the election in the ‘Any other information’ box, box 54, or in your computations, providing a clear statement that you’re making this election. The election needs to clearly identify the qualifying building or structure that it relates to and the date of the demolition.
You may receive SBA for making a capital contribution to the cost of a building or structure that would be qualifying if you owned that building or structure. If you receive SBA in this situation and:
- the building or structure you contributed to is demolished
- you have no interest in that building or structure
then you may make a claim for an allowable loss equal to the ‘unclaimed allowance amount’. The unclaimed allowance amount is the amount of the capital contribution less the SBA you already received.
If you want to claim this relief in your tax return, the Capital Gains summary, please enter code ‘OTH’ (or ‘MUL’ if more than one code applies) in box 20 and provide details of the claim in the ‘Any other information’ box, box 54, or in your computations, providing a clear statement that this relief is being claimed. The claim needs to provide information identifying the building or structure by reference to which the contribution allowance was given and specify the unclaimed allowance amount.
Online forms, phone numbers and addresses for advice on Self Assessment.