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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Leases: commutation of rent: landlord is leaseholder under short lease

Once again, the example which follows would be equally applicable to the situation where the payment was made for the variation or waiver of one or more of the terms of the lease.

On 31 October 1985, Mrs J acquired a 45 year lease over a property in return for the payment of a premium of £50,000. The rent payable under this lease was £5,000 a year.

On 31 October 1989, she granted a 21 year sub-lease over the property in return for a premium of £40,000. The rent payable under the sub-lease was £5,000 a year. One of the terms of the sub-lease was that the tenant could commute the rent for any period on the payment of a lump sum.

On 31 October 1991, the tenant exercised the right to commute the rent and paid £35,000 to Mrs J. As a result, no further rent was payable for the remaining 19 years of the sub-lease.

The gains accruing to Mrs J on the grant of the sub-lease and on the receipt of the capital payment are as follows.

Note: the gain on the original grant of the sub-lease is not recomputed in these circumstances when the capital payment is received.

  1. Gain arising on grant of sub-lease.

a) Amount chargeable under Schedule A, see CG70900.

The amount of the premium received on the grant of the sub-lease which is chargeable under Sch A is:

£40,000 - (£40,000 x 21 – 1 ) = £24,000

                                                50    )

b) Allowable expenditure, see CG71001-CG71002.

The allowable expenditure which is to be deducted is that part of the total allowable expenditure which will waste away over the term of the sub- lease.

£50,000 x 96.041 – 72.770 = £11,866

                                     98.059

c) Computation of gain.

    £
     
  Premium received 40,000
less allowable expenditure 11,866
unindexed gain   28,134
less indexation 11,866 x 0.229 2,717
Indexed gain   25,417
less amount chargeable Sch A 24,000
  Chargeable gain 1,417
  1. Gain arising on commutation payment.

a) Amount chargeable under Schedule A, see CG70900.

The capital sum received by Mrs J is treated as a premium payable in respect of a 19 year sub-lease of the property (the remaining term of the sub-lease when the capital sum is paid). The amount chargeable under Sch A is:

£35,000 - (£35,000 x 19 – 1 ) = £22,400

                                                     50   )

 

b) Allowable expenditure, see CG71001-71002.

The allowable expenditure which is to be deducted is that part of the total allowable expenditure which will waste away over the period of the sub-lease. However, that expenditure has already been allowed in computing the gain arising on the original grant of the sub-lease and therefore no deduction is due when computing the gain arising from the commutation payment.

c) Computation of gain.

  £
   
Premium received 35,000
Allowable expenditure Nil
Indexed gain 35,000
Less: amount chargeable under Schedule A 22,400
Chargeable gain 12,600

NOTE. If a taxpayer is within the charge to Capital Gains Tax, neither indexation allowance nor taper relief apply to disposals of assets on or after 6 April 2008. Previously indexation allowance had been frozen at April 1998. Companies and other concerns within the charge to Corporation Tax are not affected by these changes. For indexation allowance see CG17207+ and for taper relief see CG17895+.