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HMRC internal manual

Capital Gains Manual

From
HM Revenue & Customs
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Leases: termination of lease: general

In many ways, the termination of a lease has precisely the same results as the surrender of a lease. However, the CGT consequences can be different.

There are three basic situations in which a lease will have terminated rather than having been surrendered:

  • where the lease has come to the end of its term and is not extended;
  • where the lease has been brought to an end by one of the methods contained in the Landlord and Tenant Act 1954 or the Agricultural Holdings Act 1986, see CG72330+;
  • where the lease has been brought to an end as the result of a failure by the tenant to observe obligations imposed by the lease, for example, failure to pay the rent when due.

In the first of these situations it is unlikely that any consideration will be received by the tenant, but the expenditure on the lease will have wasted away, see CG71141-CG71162 and hence the result will be that neither a gain nor a loss arises.

In the second situation consideration will often be received. That consideration may well be exempt from Capital Gains Tax, but the precise facts will need to be ascertained to determine whether there has in fact been a termination or a surrender. If such a case is encountered, the guidance at CG72300+ should be considered.

In the third situation it is unlikely that any consideration will be received by the tenant, but the allowable expenditure will not have completely wasted away. Hence, an allowable loss will normally arise in this situation.