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HMRC internal manual

Capital Gains Manual

Leases: grant of lease out of short lease: part of land sub-let

Mr P acquired a 55 year lease over a property in return for a premium of £30,000. The annual rent payable was £5,000. Eight years later he sub-let part of the property on a 21 year lease in return for a premium of £10,000. The annual rent payable under the sub-lease was £2,000.

The Valuation Office Agency stated that:

  • the value of the original lease at the date the property was sub-let was £50,000;
  • the amount included in the £50,000 which related to the part sub-let was £15,000;
  • the notional full premium for the part sub-let would be £12,000.

The gain accruing to Mr P is then calculated as follows.

I) Amount chargeable as property income:

£10,000 - (£10,000 x 20) = £6,000


ii) Expenditure attributable to the part disposed of:


£30,000 x £15,000 = £9,000


iii) Fraction which will waste away over the term of the sub-



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

Fraction which will waste over term of sub-lease:

98.902 - 82.496 = 16.406
100   100


iv) Restriction under TCGA92/SCH8/PARA4 (2)(b), see CG71007:


actual premium = £10,000
notional full premium   £12,000


v) Allowable expenditure on grant of sub-lease:


£9,000 x 16.406 x 10,000 = £1,231
    100   12,000    


vi) Gain accruing on grant of sub-lease:


  Premium received   10,000
less Allowable expenditure   1,231
    Unindexed gain 8,769
less Indexation 1,231 x 0.566   697
    Indexed gain 8,072
less Amount chargeable as property income   6,000
    Chargeable gain 2,072


NOTE. If a taxpayer is within the charge to Capital Gains Tax, neither indexation allowance nor taper relief apply to disposals of assets on or after 6 April 2008. Previously indexation allowance had been frozen at April 1998. Companies and other concerns within the charge to Corporation Tax are not affected by these changes. For indexation allowance see CG17207+ and for taper relief see CG17895+.