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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Leases: freehold/long lease: example

On 30 June 1988, Mr J bought the freehold of a property for £150,000.

On 30 June 1991, he granted a 75 year lease of the property to Mr L. A premium of £100,000 was paid by Mr L and rent of £5,000 per year was due under the lease. Mr J incurred legal fees of £3,000 on the grant of the lease.

The Valuation Office Agency reported that, at 30 June 1991, the value of the freehold reversion was £30,000 and the value of the right to receive the rent was £70,000.

i) Mr J’s allowable expenditure under TCGA92/S38 (1)(a) is

calculated as follows:

£150,000 (cost of property) x A  
  A + B  
£150,000 x 100,000  = £75,000
  100,000 + (30,000 + 70,000)  

ii) The gain accruing to Mr J is then calculated as follows.

      £ £
  Premium received     100000
less Apportioned cost (as above)   75000  
  Legal fees   3,000 78,000
    Unindexed gain   22000
less Indexation 75,000 x 0.258   19,350
    Chargeable gain   2,650

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+.