CG71372 - Leases: commutation of rent otherwise than under terms of lease

On 31 October 2013, 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 2017, 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. The lease did not provide the tenant with a right to commute the rent.

However, on 31 October 2019 Mrs J agreed with her tenant that she would accept commutation of the rent in return for a payment of £35,000. 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.

The Valuation Office Agency reported that the value of the reversionary interest at 31 October 2019 was £20,000.

Since the lease did not provide for the commutation of rent, the receipt by Mrs J of the £35,000 commutation payment is a capital sum derived from her interest in the property and the gain arising is calculated as follows.

As the commutation of rent was not provided for in the terms of the lease, no part of the capital sum is chargeable as property income.

The allowable expenditure remaining after the grant of the sub-lease is:

see CG71371

£50,000 - £11,866

= £38,134

As there are no special rules in TCGA92/SCH8 for dealing with cases of this type, the normal part disposal rules apply (subject to the wasting provisions in TCGA92/SCH8/PARA1).

Amount of expenditure to be excluded

See CG71141.

[(P(1) - P(3)) / P(1)] x expenditure otherwise allowable under S38(1)(a)

P (1) is the percentage derived from the table in TCGA92/Sch 8/Para 1 (6) for the duration of the lease at the beginning of the period of ownership;

P (3) is the percentage derived from the table in TCGA92/Sch 8/Para 1 (6) for the duration of the lease at the date of disposal.

[(98.059 - 94.842) / 98.059] x £38,134

= £1,251

Allowable expenditure

Allowed Acquisition Cost x [ A / (A+B)]

A is the disposal consideration

B is the value retained at the time of the part disposal

(£38,134 - £1,251) x [£35,000 / (£35,000 + £20,00)]

= £23,471

Chargeable gain

Capital sum £35,000

Less allowable expenditure £23,471

£11,529