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HMRC internal manual

Capital Gains Manual

From
HM Revenue & Customs
Updated
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Leases: grant of lease out of short lease: sub-lease at higher rent

On 30 June 1987, Mrs V paid a premium of £20,000 to acquire a 30 year lease over a property. On 30 June 1992, 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 £12,000. The Valuation Office Agency stated that the notional full premium would be £15,000.

  • 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:
£20,000 x 81,100 - 61.617 = £4,462
         
    87.330    
  • 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:
£4,462 x £12,000 (the actual premium) = £3,570
         
    £15,000 (the notional full premium)