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HMRC internal manual

Capital Gains Manual

Short leases: disposal: enhancement expenditure

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

Just as the costs of acquiring a short lease waste away in accordance with TCGA92/SCH8/PARA1, see CG71141, so too does any expenditure which qualifies under TCGA92/S38 (1)(b). In respect of such expenditure, the amount to be excluded in arriving at the expenditure to be deducted in the computation of a gain on the disposal of a lease, is arrived at using the formula:

P(2)-P(3)  x  the expenditure which would otherwise be allowable under S38(1)(b)
     
P(2)    
  • P(2) is the percentage derived from the table in paragraph 1 Schedule 8 for the duration of the lease at the time that the relevant expenditure was incurred.
  • P(3) is the percentage derived from that 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.

The basic facts are the same as those used in the example in CG71144.

On 30 June 2004, Mr B paid a premium of £50,000 to acquire a 25 year lease over a property. On 30 June 2006, he spent £10,000 on capital improvements. On 30 June 2012, he disposed of the lease by assignment.

The improvements made in June 2006 were reflected in the property, and hence in the lease, at the date of disposal.

  1. Mr B’s allowable expenditure under TCGA92/S38 (1)(a) is £40,981, see CG71144.
  2. Mr B’s allowable expenditure under TCGA92/S38 (1)(b) is calculated as follows.
Actual expenditure:           £10,000
             
    Amount to be excluded, Para 1(4) Sch 8:        
    P(2) - P(3) x £10,000        
    P(2)        
             
  = 78.055 - 66.470 x £10,000 = £1,484
    78.055        
             
Expenditure allowable under S38(1)(b):   £10,000 - £1,484 =     £8,516