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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Leases: example: sale of short lease and leaseback

On 30 June 1984, Mrs H paid a premium of £20,000 to acquire a 55-year lease on a property. The rent payable was £8000 a year. On 30 June 1992, she assigned the lease in return for a payment of £25,000 plus the grant of a 25-year sub-lease of the property at a rent of £8000 a year.

The Valuation Office Agency reported that the market value of the sub-lease was £10,000.

The gain accruing to Mrs H is calculated as follows.

i) 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/SCH8/PARA1, see CG71144.

The amount to be deducted from the allowable expenditure is:

£20,000 x 100 - 98.902 = £219
         
    100    

Thus, at the date of disposal, the total allowable expenditure is: £19,781

        £ 
         
  Disposal proceeds     25,000
less allowable expenditure 19,781 x 25,000 = 14,129
    25,000 + 10,000    
         
less indexation allowance 14,129 x 0.562   7,941
    Chargeable gain    2,930

NOTE. If a taxpayer is within the charge to Capital Gains Tax, neither indexation allowance nor taper relief apply to disposals of assets on or after 6 April 2008. Previously indexation allowance had been frozen at April 1998. Companies and other concerns within the charge to Corporation Tax are not affected by these changes. For indexation allowance see CG17207+ and for taper relief see CG17895+.