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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Short leases: disposal: allowable cost of acquisition

TCGA92/S38 (1) (a) & TCGA92/SCH8/PARA1 (4)

Subject to the specific exceptions in CG71170-CG71200 below, the following rules apply to determine the expenditure which is allowable under TCGA92/S38 (1)(a), see CG15160+, on the disposal of a short lease. They apply whether:

  • the expenditure was actually incurred in obtaining the lease;
  • the ‘expenditure’ is the value of the lease at 6 April 1965;
  • the ‘expenditure’ is the value of the lease at 31 March 1982; or
  • the ‘expenditure’ is the market value of the lease at some other date.

The table in TCGA92/SCH8/PARA1 and the formula in paragraph 1(4) Schedule 8 allow the amount which is to be excluded from the allowable expenditure under Section 38(1)(a) to be calculated. The amount to be excluded is:

P(1)-P(3) x the expenditure which would otherwise be allowable under S38(1)(a)
  • P(1) is the percentage derived from the table in paragraph 1 Schedule 8 for the duration of the lease at the beginning of the period of ownership, see CG71160.
  • P(3) is the percentage derived from the table for the duration of the lease at the date of disposal.

The way that this provision works in practice is illustrated by the following example.

On 30 June 2004, Mr B paid a premium of £50,000 to acquire a 25 year lease over a property. On 30 June 2012, he disposed of that lease by assignment.

At the date of disposal, the lease had 17 years to run and therefore the rules in TCGA92/SCH8/PARA1 apply.

Mr B’s allowable expenditure under TCGA92/S38 (1)(a) is calculated as follows.

Actual expenditure           £50,000
Amount to be excluded   Para 1(4) Sch 8:        
    P(1) - P(3) x £50,000    
  = 81.100 - 66.470 x £50,000 = £9,019
Expenditure allowable under S 38(1)(a):   £50,000 - £9,019     = £40,981

This example assumes that no relief was due to Mr B under ICTA88/S87, see BIM46250 onwards. Where such relief has been given, see CG71200.