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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Measuring the profits (particular trades): land: trading transactions: acquisition and disposal of superior interest: example

The following example demonstrates the point.

Tenancy acquired 1 January 2010: Cost: Nil.

Freehold acquired, subject to tenancy, 4 December 2011: Cost: £500,000.

Value of tenancy at 4 December 2011: £250,000.

Freehold with vacant possession sold 4 December 2011: £1m.

Capital Gain: There will be a capital gain by virtue of S161 Taxation of Chargeable Gains Act 1992 based on the value of the tenancy at 4 December of £250,000 less the acquisition costs.

Trading Computation

Sale proceeds   £1,000,000
cost of freehold £500,000  
value of tenancy £250,000 £ 750,000
Trading Profit   £ 250,000