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HMRC internal manual

Capital Gains Manual

Leases: commutation of rent otherwise than under terms of lease

The facts are the same as in CG71371, except that the lease did not provide the tenant with a right to commute the rent. However, Mrs J agreed with the tenant commutation terms which were identical to those in CG71371.

The Valuation Office Agency reported that the value of the reversionary interest at 31 October 1991 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 under Schedule A.

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

£50,000 - £11,866 = £38,134

see CG71371

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).

ii) Exclusion from allowable expenditure, see CG71144:


£38,134 x …..P(1) – P(3)


= £38,134 x 98.059 – 94.842


= £1,251

iii) Allowable expenditure:

(£38,134 - £1,251) x                 A   

                                                    A + B

= £36,883 x                           £35,000       

                                    £35,000 + £20,000

= £23,471

iv) Computation of gain:

  Capital sum received 35,000
Less allowable expenditure 23,471
  unindexed gain 11,529
less indexation 23,471 x 0.413 9,693

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+.