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HMRC internal manual

Capital Gains Manual

Leases: granting of a lease: capital improvements by tenant

TCGA92/Sch 8/Para 7

If a lease is granted on terms which require the tenant to undertake capital improvements to the property, the value of the landlord’s interest in the property will be increased. This increase in value, which will not necessarily be the same as the cost incurred by the tenant, is treated for property income purposes as being a premium, in addition to any other premium which is paid, by virtue of ITTOIA05/S278 or CTA09/S218, see PIM1212.

Where a landlord is charged to Income Tax under ITTOIA05/S278 or CTA09/S218 in the above circumstances, the amount of the deemed premium should be treated as expenditure incurred by the landlord at the time that the lease was granted, TCGA92/Sch 8/Para 7. This expenditure is to be taken into account in the computation of the gain arising on the grant of the lease, that is, it is treated like any other expenditure which satisfies the terms of TCGA92/S38 (1)(b).