Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Capital Gains Manual

From
HM Revenue & Customs
Updated
, see all updates

Leases: capital sum received by landlord for accepting surrender of lease

TCGA92/SCH8/PARA3 (2), (4) and (6)

A landlord may receive a capital sum from a tenant in return for accepting a surrender of a lease. The way in which the gain accruing to the landlord is calculated depends principally on whether the terms of the lease provided for such a payment.

  • If the terms of the lease did provide for such a payment, the capital sum is not treated as a part-disposal of the landlord’s interest in the land. Rather, it is treated as being a disposal of the landlord’s interest in a separate asset, that is the lease.
  • If the terms of the lease did not provide for such a payment, the capital sum is chargeable under TCGA92/S22 (1), see CG12940+, and will amount to a part disposal of the landlord’s interest in the land.

The way in which these rules work in practice is illustrated in the following examples.

Example 1

On 1 June 2003, Mrs S acquired the freehold of a property for £30,000. On 31 October 2005, she granted a 21 year lease of the property in return for a premium of £10,000. Under the terms of the lease, the tenant was entitled to surrender the lease after six years on payment of £5,000. The tenant exercised this right on 31 October 2011.

The District Value reported that the value of Mrs S’s interest in the property, on 31 October 2005, after the granting of the lease, was £40,000.

The computation of the gain arising to Mrs S, as a result of the surrender of the lease, is as follows.

Amount chargeable as income of a UK property business:

£5,000 - (£5,000 x 6 - 1) = £4,500
         
    50    

Note: the lease is treated as having a duration of only six years.

Gain:

  £
   
‘Premium’ received 5,000
Less: Amount chargeable as income 4,500
   
Chargeable gain 500

Note: no deduction is made of any part of the cost of the freehold interest. This is because the receipt of the capital sum is treated as the disposal of a separate asset, that is Mrs S’s interest in the lease.

Example 2

The facts are the same as those used in example 1, except that the terms of the lease did not specifically provide for its early surrender. However, on 31 October 2011, Mrs S agreed with her tenant that she would accept a surrender of the lease in return for a payment of £5,000.

The Valuation Office Agency reported that the value of Mrs S’s freehold interest, after accepting the surrender of the lease, was £70,000.

In these circumstances, in order to calculate the gain on the surrender payment, you need to know the allowable expenditure remaining after the grant of the original lease. You therefore first need to calculate the gain arising on the grant of the lease. You can then calculate the gain arising on the surrender payment.

The gains accruing to Mrs S are as follows.

  1. Gain arising on grant of lease.

Amount chargeable as income of a UK property business:

£10,000 - (£10,000 x 21 - 1) = £6,000
             
        50    
          £
           
  ‘Premium’ received       10,000
Less: amount chargeable as income       6,000
          4,000
Less: allowable expenditure £30,000 x 4,000 = 2,400
      10,000 + 40,000    
           
  Chargeable gain       1,600

Note: in this case the lease is treated as having a duration of 21 years as it contained no provision for early surrender.

  1. Gain arising on surrender of lease.
            £
             
  Capital sum received         5,000
Less: allowable expenditure          
    £27,600 x 5,000 = 1,840
        5,000 + 70,000    
             
  CHARGEABLE GAIN         3,160