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HMRC internal manual

Capital Gains Manual

Leases: grant of short lease out of a freehold or long lease

Where a short lease, that is a lease with a term not exceeding 50 years, is granted out of a freehold or long lease, there are two particular rules which must be applied.

  • part of any premium paid will be chargeable as property income, see CG70900, and this part must be deducted in arriving at the consideration to be brought into the CGT computation.
  • in the A / (A + B) formula used for determining the allowable expenditure, the A in the numerator is not the same as the A in the denominator.

Part disposal calculation

As with the grant of any lease, the grant of a short lease out of a freehold or long lease is a part disposal. However, in applying the A / (A + B) part disposal formula in TCGA92/S42, a special rule must be observed.

  • The A in the numerator (the top part of the fraction) is the amount of the premium not chargeable as property income.
  • The A in the denominator (the bottom part of the fraction) is the full amount of the premium.

The amount chargeable to property income is not deducted in arriving at the A factor in the denominator since the denominator must represent the value of the whole interest held by the landlord before the grant of the lease.

Example

On 6 April 2010, Miss S bought a freehold property for £450,000 including expenses of purchase. On 6 April 2017 she granted a 46 year lease for a premium of £350,000 and a rent of £20,000 per year. She incurred legal costs of £2,500. The Valuation Office Agency reported that the value of the reversionary interest in the property was £500,000.

The computation of the gain is as follows:

i) Amount chargeable as property income

As per CG70900:

 

P - [ (P x Y) / 50 ]

= £350,000 - [ (£350,000 x 45) / 50 ] = £35,000

 

ii) Consideration for capital gains purposes

 

Premium - Amount chargeable as property income

= £350,000 - £35,000

= £315,000

 

iii) Allowable expenditure (part disposal formula)

 

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

= £450,000 x [ £315,000 / (£350,000 + £500,000) ]

= £166,765

 

iv) Chargeable gain

 

Consideration - allowable expenditure - legal costs

= £315,000 - £166,765 - £2,500

= £145,735