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HMRC internal manual

Capital Gains Manual

Leases: grant of lease out of short lease: allowable expenditure

TCGA92/Sch 8/Para 4

Where a short lease, that is a lease for a term of not more than 50 years, is granted out of a short lease, TCGA92/Sch 8/Para 4 (1) over-rides the normal part disposal rules in TCGA92/S42.

A short lease is a wasting asset, see CG70752, and therefore the allowable expenditure attributable to it reduces over its term. The expenditure which is allowable when a short lease is granted out of a short lease is the proportion of the allowable expenditure which will waste away over the duration of the sub-lease. This is illustrated by the example below.

Example

Mrs S paid a premium of £200,000 to acquire a 30 year lease over a property. Five years later she granted a sub-lease for 10 years over the whole property. The rent payable under the sub-lease was the same as that payable under the original lease.

The expenditure which is allowable on the grant of the sub-lease is the amount which will waste away over its 10 year duration. When the sub-lease was granted, Mrs S’s original lease had 25 years left to run. When the sub-lease ends, her original lease will have 15 years left to run.

The factors which are required from the table in TCGA92/Sch 8/Para 1, see CG71141, are:

Factor for 30 years (the term of Mrs S’s lease when acquired): 87.330

Factor for 25 years ( the remaining term when the sub-lease was granted); 81.100

Factor for 15 years (the remaining term when the sub-lease expires): 61.617

 

The proportion of the expenditure which will waste away during the term of the sub-lease is:

£200,000 x [ (81.100 - 61.617) / 87.330 ] = £44,620