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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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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 £30,000 and that the value of the right to receive the rent over the term of the lease was £20,000.

The computation of the gain is as follows.
 

    £  
       
I) Amount chargeable under Schedule A      
Premium received   35,000  
Amount chargeable under Sch A: 35,000 - (35,000 x 45) 3,500
    50  
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 + (30,000 + 20,000)  

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+.