Leases: disposal: extension of lease: ESC D39
Scope of ESC D39
The terms of a particular lease may provide for its extension if the tenant so requests. If such a request is made, the extension of the lease does not have any immediate consequences for capital gains purposes for the lessee.
However, the extension of a lease outside its original terms entails the surrender of the old lease and the grant of a new one. The surrender of the old lease is a disposal for the purposes of capital gains with the consideration received being the value of the new lease.
In practice, the surrender of an existing lease and the grant of a new lease should not be treated as a disposal for the purposes of capital gains if the taxpayer so wishes and all of the following conditions are satisfied:
- the transaction, whether made between connected or unconnected parties, is made on terms equivalent to those that would have been made between unconnected parties bargaining at arms length;
- the transaction is not part of or connected with a larger scheme or series of transactions;
- a capital sum is not received by the tenant;
- the extent of the property under the new lease is the same as that under the old lease;
- the terms of the new lease (other than its duration and the amount of rent payable) do not differ from those of the old lease. Trivial differences should be ignored.
Effect of ESC D39
Where ESC D39 has applied, and the extended lease is subsequently disposed of, the following rules apply.
i) The extended lease is treated as having been acquired on the date that the original lease was acquired.
ii) If the original lease was acquired before 1 April 1982, and the extended lease is disposed of after 5 April 1988, the rebasing rules, see CG16700C, will apply. However, the lease which is to be valued at 31 March 1982 is the lease which existed at that time.
Thus, if the lease was extended after 31 March 1982, it is the remaining term of the original, unextended lease which is to be valued at that date. That value is then ‘wasted’ (if appropriate) by reference to the duration of the extended lease.
Mr P acquired a 25 year lease over a property on 31 March 1970. On 31 March 1986, when the original lease had nine years left to run, he was granted a 45 year extension of the lease. The terms of ESC D39 were satisfied and Mr P requested that the concession should apply. The consequences are as follows:
- If he disposed of the extended lease after 5 April 1988, the asset to be valued at 31 March 1982 would be the original lease which then had 13 years left to run.
- If he disposed of the extended lease between 6 April 1988 and 31 March 1990, the ‘wasting’ rules in TCGA92/Sch 8/Para 1, see CG71141, would not apply as the remaining term of the lease would be more than 50 years.
- If he disposed of the extended lease after 31 March 1990, the wasting rules in TCGA92/Sch 8/Para 1 would apply. The factor P(3), see CG71141, would be calculated by reference to the remaining term of the extended lease.
ESC D39 only applies to the lessee. Where a lease is extended, see CG71350p for implications for the lessor.