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HMRC internal manual

Capital Gains Manual

Leases: sale and leaseback

If a freehold or leasehold interest in land is disposed of, on terms which include the provision that the purchaser will grant a lease of the whole or part of the land in question to the vendor, that should be treated as a part-disposal by the vendor. It should not be treated as two separate disposals, one by the vendor and one by the purchaser, see Sargaison v Roberts 45TC612.

The value of the interest which is retained by the vendor is the market value of the lease granted by the purchaser.

It is possible that a charge arises under ITTOIA05/S285 or CTA09/S225, see PIM1226. Note a charge does not arise if the lease is granted and begins to run within one month of the sale.

The way in which gains are computed in such cases is illustrated by the examples below.  Note for companies, indexation may also be due.

Example 1 - Sale of Freehold and Leaseback

On 30 June 2012, Mr M bought the freehold of a property for £600,000. On 30 June 2017, he sold the property for £800,000 plus the grant of a 25-year lease at a rent of £100,000 a year.

The Valuation Office Agency reported that the market value of the lease was £300,000.

The gain accruing to Mr M is calculated as follows:

Disposal proceeds

£800,000

Allowable expenditure

Acquisition Cost x [A / (A + B)]

=

£600,000 x [800,000 / (800,000 + 300,000)] = £436,364

 

Chargeable gain

£800,000 - £436,364 = £363,636

 

Example 2 - Sale of short lease and leaseback

On 30 June 2009, Mrs H paid a premium of £200,000 to acquire a 55-year lease on a property. The rent payable was £80,000 a year. On 30 June 2017, she assigned the lease in return for a payment of £250,000 plus the grant of a 25-year sub-lease of the property at a rent of £80,000 a year.

The Valuation Office Agency reported that the market value of the sub-lease was £100,000.

The gain accruing to Mrs H is calculated as follows.

Disposal proceeds

£250,000

Total allowable expenditure

Since the lease had less than 50 years to run at the date of the part disposal, the expenditure needs to be ‘wasted’ in accordance with TCGA92/Sch 8/Para 1, see CG71144.

The amount to be deducted from the allowable expenditure is:

 

Premium x { [P(1) - P(3)] / P(1) } 

=

£200,000 x { [100 - 98.902] / 100 } = £2,196

 

Thus, at the date of disposal, the total allowable expenditure is:

 

£200,000 - £2,196 = £197,804

 

Allowable expenditure

Total allowable expenditure x [A / (A + B)]

=

£197,804 x [250,000 / (250,000 + 100,000)] = £141,289

 

Chargeable gain

£250,000 - £141,289 = £108,711