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HMRC internal manual

Capital Gains Manual

Leases: grant of lease out of short lease: computation of gain

TCGA92/Sch 8/Para 4

Where a short lease is granted out of a short lease, a part of the premium received will be chargeable as property income, see CG70900P. This amount must be excluded when arriving at the gain accruing on the grant of the sub-lease.

The way in which this is done is by initially using the full amount of the premium as the consideration for capital gains purposes. After calculating the gain, the amount chargeable as property income is deducted to arrive at the chargeable gain.

In the case of companies, the deduction is made after indexation has been deducted.

However, this deduction cannot transform an indexed gain into an allowable loss, nor can it increase the amount of an indexed loss - TCGA92/Sch 8/Para 5 (2).

The method of computing the gain in these circumstances is illustrated by the following examples.

Example 1

Mr W paid a premium of £300,000 to acquire a 55 year lease on a property. Seven years later he granted a 30 year sub-lease over the whole property in return for a premium of £400,000. The rent payable under the sub-lease was the same as the rent payable under the original lease.

Although the original lease was a long lease when it was acquired, it had become a short lease by the time that the sub-lease was granted as its remaining term was then 48 years.

i) Allowable expenditure

Mr W’s allowable expenditure on the grant of the sub-lease, see CG71001, is:

£300,000 x [ (99.289 - 68.697) / 100 ] = £91,776

 

ii) Amount of premium chargeable as property income

The amount of the premium chargeable as property income, see CG70900P, is:

£400,000 - [ (£400,000 x 29) / 50 ] = £168,000

 

iii) Compute the gain without reference to the amount chargeable as property income

The gain accruing to Mr W is:

Premium - Allowable Expenditure

= £400,000 - £91,776

= £308,224

 

iv) Chargeable gain

The chargeable gain accruing to Mr W is:

Gain - Amount chargeable as property income

= £308,224 - £168,000

= £140,224

 

Example 2

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 in return for a premium of £150,000. The rent payable under the sub-lease was the same as the rent payable under the original lease.

i) Allowable expenditure

Mrs S’s allowable expenditure on the grant of the sub-lease, see CG71001, is:

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

 

ii) Amount of premium chargeable as property income

The amount of the premium chargeable as property income, see CG70900P, is:

£150,000 - [ (£150,000 x 9) / 50 ] = £123,000

 

iii) Compute the gain without reference to the amount chargeable as property income

The gain accruing to Mrs S is:

Premium - Allowable Expenditure

= £150,000 - £44,620

= £105,380

 

iv) Chargeable gain

The chargeable gain accruing to Mrs S is:

Gain - Amount chargeable as property income

= £105,380 - £123,000

= £ NIL

 

Since the deduction of the amount chargeable as property income cannot transform a gain into an allowable loss, the result in this case is no gain/no loss.

 

Example 3

LN Ltd paid a premium of £300,000 to acquire a 55 year lease on a property on 6 February 2010. On 6 February 2017 the company granted a 30 year sub-lease over the whole property in return for a premium of £400,000. The rent payable under the sub-lease was the same as the rent payable under the original lease.

Although the original lease was a long lease when it was acquired, it had become a short lease by the time that the sub-lease was granted as its remaining term was then 48 years.

i) Allowable expenditure

LN Ltd’s allowable expenditure on the grant of the sub-lease, see CG71001, is:

£300,000 x [ (99.289 - 68.697) / 100 ] = £91,776

 

ii) Amount of premium chargeable as property income

The amount of the premium chargeable as property income, see CG70900P, is:

£400,000 - [ (£400,000 x 29) / 50 ] = £168,000

 

iii) Compute the unindexed gain without reference to the amount chargeable as property income

The gain accruing to LN Ltd is:

Premium - Allowable Expenditure

= £400,000 - £91,776

= £308,224

 

iv) Compute the indexation allowance

Indexation = 0.224 x £91,776

= £20,558

 

v) Compute the indexed gain

Unindexed gain - Indexation allowance

= £308,224 - £20,558

= £287,666

 

vi) Chargeable gain

The chargeable gain accruing to LN Ltd is:

Indexed gain - Amount chargeable as property income

= £287,666 - £20,558

= £267,108

 

For companies, the indexed gain must be calculated before the amount chargeable as property income is deducted.  Neither indexation, nor the amount chargeable as property income can create or increase a loss.