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HMRC internal manual

Capital Gains Manual

Leases: grant of lease out of short lease: restriction of capital loss

TCGA92/Sch 8/Para 6 (1)


  • a short lease is granted out of a short lease;
  • a capital loss arises; and
  • the holder of the original lease is entitled to relief under ITTOIA05/S292 or CTA09/S232, see PIM2320,

the allowable loss is restricted by the amount of the relief given under ITTOIA05/S292 or CTA09/S232.

The operation of TCGA92/Sch 8/Para 6 (1) cannot convert a loss into a chargeable gain. Where the relief given under ITTOIA05/S292 or CTA09/S232 exceeds the loss, the result is no gain/no loss.


Miss P acquired a 40 year lease on a property, paying a premium of £300,000. She attempted to sub-let the property, but had difficulty in finding a tenant. Five years later she granted a 21 year sub-lease of the property for a premium of £50,000. The rent payable under the sub-lease was the same as that payable under the original lease.

The computation of the loss accruing to Miss P is as follows:

i) Deduction for premium paid

Prior to the grant of the sub-lease, Miss P was entitled to a deduction under ITTOIA05/S292 or CTA09/S232, see PIM2320, of £1,650 for each year.


ii) Premium on grant of sub-lease chargeable as property income

=£50,000 - [ (£50,000 x 20) / 50 ]



iii) Total deductions from the rent under ITTOIA05/S292 or CTA09/S232 over the term of the sub-lease

= £1,650 x 21 = £34,650 

less £30,000 (premium received on grant of sub-lease)

= £4,650


iv) Miss P’s allowable expenditure on the grant of the sub-lease

= £300,000 x [ (91.981 - 58.971) / 95.457 ]

= £103,744


v) Miss P’s loss is then calculated

Premium - Allowable expenditure

= £50,000 - £103,744

= (£53,744)


vi) Add back deductions allowable

= (£53,744) + £4,650

= (£49,084)


Miss P’s loss has therefore been reduced from £53,744 to £49,084.

The add back at stage vi) could not have converted the loss to a gain.  The most it can do is reduce a loss to nil.