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HMRC internal manual

Capital Gains Manual

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


The following example illustrates the rules set out in CG70960 and CG70961.

On 6 April 1985, Miss S bought a freehold property for £45,000 including expenses of purchase. On 6 April 1992 she granted a 46 year lease for a premium of £35,000 and a rent of £2,000 per year. The Valuation Office Agency reported that the value of the reversionary interest in the property was £50,000.

The computation of the gain is as follows.


I) Amount chargeable as property income      
Premium received   35,000  
Amount chargeable as property income: 35,000 - (35,000 x 45) 3,500
Consideration for CGT purposes   31,500  
ii) Allowable expenditure      
Applying the part disposal formula in TCGA92/S42: 45,000 x 31,500 = 16,677
    35,000 + 50,000  


Note: The A factor in the numerator is the consideration for CGT purposes; the A factor in the denominator is the entire premium.

iii) Chargeable gain


Disposal proceeds 31,500
less Allowable expenditure 16,677
Unindexed gain 14,823
less Indexation 16,677 x .464 = 7,739
Chargeable gain 7,084


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+.