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HMRC internal manual

Capital Gains Manual

Leases: grant of lease out of short lease: sub-lease at higher rent

TCGA92/Sch 8/Para 4 (2) (b)

When a sub-lease is granted out of an existing lease, the rent payable under the sub-lease may be higher than the rent payable under the original lease. In such circumstances, the premium chargeable for the sub-lease will usually be lower than it would have been if the rental terms of the sub-lease had been the same as those of the original lease.

Where this is the case, and both the sub-lease and the original lease are short leases, the amount of the expenditure allowable under TCGA92/S38 (1)(a) and (b) is reduced.

Initially, the expenditure is calculated in the manner set out in CG71001. This amount is then multiplied by the fraction:

 

Actual premium / Notional full premium

 

The ‘notional full premium’ is the premium which would have been received if the rent payable under the sub-lease had been the same as the rent payable under the original lease.

If the rent payable under the sub-lease is less than the rent payable under the original lease, there is no corresponding increase in the allowable expenditure on the grant of the sub-lease.

If you meet a case in which the rent charged under the sub-lease is greater than the rent payable under the original lease, you should obtain, by way of a memo setting out the full facts, the Valuation Office Agency’s opinion of the ‘notional full premium’.

Example

Mrs V 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 original lease was £8,000 per year; the rent payable under the sub-lease was £10,000 per year.

Mrs V received a premium of £120,000. The Valuation Office Agency stated that the notional full premium would be £150,000.

i) Allowable expenditure if sub-lease rental payments were the same or less than lease rental payments

If the sub-lease had required the same rental payments as the original lease, Mrs V’s allowable expenditure on the grant of the sub-lease would have been:

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

 

ii) Allowable expenditure as sub-lease rental payments are more than lease rental payments

Since the rent payable under the sub-lease is greater than that payable under the original lease, Mrs V’s allowable expenditure on the grant of the sub-lease is reduced as follows:

Allowable expenditure x (Actual premium / Notional full premium)

=£44,620 x (£120,000 / £150,000)

=£35,696