Leases: grant of lease out of short lease: part of land sub-let
TCGA92/Sch 8/Para 4 (3)
- a short lease is granted out of a short lease, and
- the sub-lease covers only part of the land covered by the original lease
the amount of the allowable expenditure on the grant of the sub-lease is reduced.
There are a number of stages in the calculation:
i) The amount of the premium chargeable as property income must be calculated, see CG70900P.
ii) The part of the total allowable expenditure attributable to the part disposed of is calculated on A / (A+B) lines, see CG12730P.
iii) The part of the expenditure which will waste away over the term of the sub-lease is calculated, see CG71001.
iv) Any restriction due if the actual premium is less than the ‘notional full premium’ is calculated, see CG71007.
v) All the above factors are combined to calculate the allowable expenditure.
vi) The gain arising can then be computed.
Any valuations which are required should be obtained from the Valuation Office Agency, see CG74000C.
Mr P acquired a 55 year lease over a property in return for a premium of £300,000. The annual rent payable was £50,000. Eight years later he sub-let part of the property on a 21 year lease in return for a premium of £100,000. The annual rent payable under the sub-lease was £20,000.
The Valuation Office Agency stated that:
- the value of the original lease at the date the property was sub-let was £500,000;
- the amount included in the £500,000 which related to the part sub-let was £150,000;
- the notional full premium for the part sub-let would be £120,000.
Factor for 55 years (term of original lease when acquired): 100
Factor for 47 years (remaining term of original lease when sub-lease granted): 98.902
Factor for 26 years (remaining term of original lease when sub-lease expires): 82.496
The gain accruing to Mr P is then calculated as follows:
i) Amount chargeable as property income:
= £100,000 - [ (£100,000 x 20) / 50 ]
ii) Part of total allowable expenditure attributable to the part disposed:
= £300,000 x (£150,000 / £500,000)
iii) Part which will waste away over the term of the sub-lease:
= [ (98.902 - 82.496) / 100 ] = 0.16406
iv) Restriction where sub-lease at higher rent;
= (£100,000 / £120,000)
v) Allowable expenditure on grant of sub-lease:
= £90,000 x 0.16406 x 0.8333
vi) Gain accruing on grant of sub-lease:
= £100,000 - £12,305
less chargeable as property income
= £87,695 - £60,000