Guidance

HS292 Capital Gains Tax, land and leases (2023)

Updated 6 April 2024

The following guidance includes calculations.

This helpsheet will help you fill in the Capital Gains Tax summary pages of your tax return. It explains how certain disposals of land (including leases) are treated for Capital Gains Tax.

This should only be used as an introduction. If you’re in doubt about your circumstances, you should ask your tax adviser for advice. Find out more in the Capital Gains Tax Manual.

1. Your Capital Gains Tax liability

If you dispose of land or any interest in land, you may make a chargeable gain or an allowable loss. Generally, the calculation of the gain or loss is the same as for other assets, but there are some special rules which apply only to land.

As a UK resident, if you dispose of an interest in UK residential property (wholly or partly) where there’s a CGT liability, you should have reported and paid any CGT due, within a specific time frame following completion of conveyance. The time frame for reporting and paying any Capital Gains Tax due is within 60 days of completion if completion was on or after 27 October 2021. Find more information on Report and pay Capital Gains Tax on UK property.

Non-UK residents disposing (directly or indirectly) of interest in UK land, should refer to Non-resident Capital Gains for land and property in the UK (Self Assessment helpsheet HS307).

2. Leases

This is only a summary of the main provisions.

2.1 Grant of lease

The grant of a lease is known as a part disposal. In certain circumstances, you may also be chargeable to Income Tax. Grants of leases fall into 3 categories, where the tax treatment is different for each category. These are the grant of a:

• long lease out of a freehold or long leasehold interest (with more than 50 years duration remaining)
• short lease out of a freehold or long leasehold interest (with no more than 50 years remaining)
• short lease out of a short leasehold interest (with no more than 50 years remaining)

Normally, the duration of a lease (for Capital Gains Tax purposes) will be the time remaining until the expiry of the current term of the lease. However, this can be affected by any provision in the lease, such as those allowing the:

• landlord or tenant to give a termination notice to end the lease
• tenant to extend the lease

2.2 Grant of a long lease out of a freehold or long leasehold interest

To calculate the gain arising on the part disposal, any allowable expenditure (excluding the disposal cost) is apportioned between the freehold reversion or superior leasehold interest retained, and the lease granted. This is done by applying the fraction A ÷ (A + B) to the allowable expenditure. The same is done for part disposals of other assets, however it differs slightly (see Business assets).

For the granting of a lease:

• A is the premium or consideration received for the grant of the lease
• B is the value of the interest retained which includes the value of the right to receive the rent due under the lease

Example 1

On 30 June 1989, Mr Jones bought the freehold of a property for £150,000. On 30 June 2022, he granted a 75-year lease of the property for a premium of £200,000. Rent of £5,000 a year was due under the lease. Mr Jones incurred legal fees of £3,000 on the grant of the lease.

The value of the interest retained is the freehold subject to the lease and at 30 June 2022 this was valued at £100,000.

Mr Jones’ allowable expenditure is the cost of property × A ÷ (A + B). So, £150,000 × £200,000 ÷ (£200,000 + £100,000) = £100,000, meaning the allowable expenditure is £100,000.

The gain accruing to Mr Jones is then calculated as follows: the premium received (£200,000), minus the apportioned cost (£100,000) and legal fees (£3,000), which leaves a chargeable gain of £97,000.

2.3 Grant of a short lease out of a freehold or long leasehold interest

Part of any premium you may receive for the grant of a short lease is chargeable to Income Tax. See page UKPN 4 (box 22) of the UK property notes for further details.

The calculation is made as for the grant of a long lease, except that the amount chargeable to Income Tax is:

• left out of the consideration brought into the calculation of the gain or loss arising
• left out of the numerator A in the A ÷ (A + B) fraction used to apportion the allowable cost between the freehold or superior leasehold interest retained and the lease granted, but
• included in A in the denominator of the A ÷ (A + B) fraction

Example 2

On 6 April 1986 Miss Smith bought a freehold property for £45,000.

On 6 April 2022 she granted a 46-year lease for a premium of £35,000 and a rent of £2,000 a year. The value of the freehold following the grant the lease was £50,000. The amount chargeable to Income Tax is £35,000 minus (£35,000 × 45) ÷ 50 = £3,500.

The consideration for Capital Gains Tax is calculated as follows: the premium received is £35,000, minus the amount chargeable to Income Tax (£3,500), which leaves £31,500.

Allowable expenditure (applying the part disposal formula) is calculated as follows: £45,000 × £31,500 ÷ (£35,000 + £50,000) = £16,677.

The A factor in the numerator is the consideration for Capital Gains Tax purposes (£31,500); the A factor in the denominator is the entire premium (£35,000).

The chargeable gain is then calculated as follows: The disposal proceeds for Capital Gains purposes of £31,500, minus the allowable expenditure of £16,677, which leaves a chargeable gain of £14,823.

2.4 Grant of a short lease out of a short leasehold interest

Part of any premium you may receive for the grant of a short lease is chargeable to Income Tax. See page UKPN 4 (box 22) of the UK property notes for further details.

In calculating the amount chargeable to Capital Gains Tax:

• the full amount of any premium payable for the granting of the lease is brought into the calculation of the gain or loss as the consideration received, but a deduction of the amount chargeable to Income Tax is made later in the calculation
• special rules apply for calculating the allowable expenditure to be deducted from the consideration in calculating the gain or loss
• if a capital loss arises, it may be restricted in some circumstances

HMRC will let you have the details necessary to calculate your chargeable gain or allowable loss.

2.5 Other sums received after you grant a lease

During the existence of a lease you may receive a capital sum in exchange for:

• the surrender of the lease
• rent
• the variation or waiver of some of the terms of the lease

Such a capital sum is chargeable to Capital Gains Tax. You can ask HMRC or your tax adviser for advice on Self Assessment, to calculate your taxable gain or allowable loss.

2.6 Assignment or surrender of a lease

If you’ve assigned or surrendered a lease, you’ve made a complete disposal of that leasehold interest. The amount of your gain or loss depends on whether the lease was a long lease or a short lease at the date of disposal.

A long lease is one with more than 50 years duration remaining. A short lease has no more than 50 years remaining. Normally, the duration of a lease (for Capital Gains Tax purposes) will be the time remaining until the expiry of the current term of the lease. However, this can be affected by any provision in the lease, such as those allowing the:

• landlord or tenant to give a termination notice to end the lease
• tenant to extend the lease

For a long lease, any allowable expenditure is allowed in calculating the gain or loss in the normal way. For a short lease, the allowable expenditure is restricted and special rules apply. You can ask HMRC or your tax adviser for advice on Self Assessment, to calculate your taxable gain or allowable loss.

3. Extension of a lease

If you’ve extended the duration of a lease this may be a disposal for capital gains purpose as certain extensions are the disposal of the old lease and the grant of a new lease. There may also be capital gains implications for the person granting the lease extension. There is specific guidance for people extending their lease which may mean that no gain arises. If you have extended a lease you can ask HMRC or your tax adviser for advice on Self Assessment, to calculate your taxable gain or allowable loss.

4. Compulsory purchase

If your land is compulsorily purchased, you’re subject to Capital Gains Tax in the normal way, but there are some special rules. These:

• determine the date of disposal
• provide for some small disposals not to be treated as a disposal
• allow for any gain arising to be rolled over against the acquisition of new land in certain circumstances
• provide for an apportionment of the compensation between its constituent factors

4.1 Date of disposal

Where land is acquired, otherwise than under a contract, by an authority possessing or exercising compulsory purchase powers, the date of disposal is the time at which the compensation for the acquisition is agreed or otherwise determined. Any variation on appeal is ignored for the purpose of determining the date of disposal. If the land is acquired under a contract then the date of disposal is determined by reference to s28 TCGA 1992.

4.2 Small part disposals

Where the land compulsorily acquired is only part of a larger holding of land, you may claim that the compensation received should not be regarded as a disposal — it should instead be deducted from the allowable expenditure on the entire holding. To do this, the following conditions must be met:

• the holding is not a wasting asset — for land this usually means that the land is not held under a lease with no more than 50 years still to run
• the market value of the land is small, compared to the value of the entire holding — a holding for this purpose does not necessarily comprise the whole of your estate, but means the smallest unit of land with a separately identifiable cost, which includes all of the land compulsorily acquired
• you must have taken no steps to make it known, by advertising or otherwise, that you were prepared to sell any part of the holding

On a later disposal, or part disposal, of the remainder of the holding, only the reduced expenditure is taken into account in calculating any subsequent gain or loss.

Example 3

The freehold of an area of land was purchased at a cost of £200,000 in 1999. A small strip of the land is acquired by compulsory purchase for £8,000 in 2003 for a road widening scheme. A claim is made for the disposal to be disregarded. The remaining land is sold for £250,000 in 2022. There’s no gain or loss on receipt of the compensation. The original cost of £200,000 is reduced by the £8,000 received to leave £192,000.

The chargeable gain on the sale in 2022 is calculated as follows: the sale proceeds of £250,000, minus the revised cost of £192,000 (as set out above), which leaves a chargeable gain of £58,000.

If you want to claim this relief in your tax return, the Capital Gains summary, enter code ‘OTH’ in box 8, 20 or 28 and provide details of the claim in the ‘Any other information’ box, box 54, or in your computations, providing a clear statement that this relief is being claimed. This must be claimed at the time the compensation is received otherwise the compensation received will require the return of a Capital Gain.

4.3 Compensation used to acquire new land

If you apply the compensation you received for land compulsorily acquired, in acquiring new land, you may claim to roll-over the gain you make against the cost of the new land. In that case, the compulsory purchase is treated as giving rise to no gain or loss, and the cost of the new land is reduced by the amount of the gain which would otherwise have arisen. To do this, the following conditions must be met:

• you’ve taken no steps to make it known, by advertising or otherwise, that you were prepared to sell any part of the holding
• the new land cannot include a dwelling house that is or may become your only or main residence

If the new land will become a wasting asset within 10 years (typically a lease which (on acquisition) has no more than 60 years to run), the rules are modified. They’re also modified where only part of the compensation is applied in acquiring the new land. Ask HMRC or your tax adviser for further information.

If you want to claim this relief in your tax return, the Capital Gains summary pages, enter code ‘ROR’ in box 8, 20 or 28 and provide details of the claim in the ‘Any other information’ box, box 54, or in your computations, providing a clear statement that you’re claiming this relief. You can do this by completing the form attached to Business Asset Roll-over Relief (Self Assessment helpsheet HS290) and sending it to HMRC with your tax return.

Example 4

Mrs Davies bought some land for £50,000 in April 1991. It is compulsorily purchased as part of the construction of a new railway line for agreed compensation of £80,000. The date of disposal is May 2022. The compensation is used to buy more land costing £100,000 and she claims that the gain should be rolled over.

The gain is calculated as follows: the compensation of £80,000, minus the cost of £50,000, giving a gain of £30,000.

The gain is reduced by the rollover to zero and the allowable cost of the new land becomes the cost (£100,000) minus the gain rolled over (£30,000), amounting to £70,000.

4.4 Apportionment of compensation

In law, compensation for compulsory purchase is a single sum but for tax purposes it’s apportioned between its constituent factors, and is taxable accordingly. The categories for which compensation may be received are for:

• the land itself
• disturbance
• severance or injurious affection

Compensation for disturbance may include several items and the tax treatment varies accordingly. The most common elements are dealt with as follows:

• compensation for losses on stock and loss of profits is taxable as income
• compensation for loss of goodwill is chargeable to Capital Gains Tax
• compensation for expenses is set against those expenses
• any remaining amounts are chargeable to Capital Gains Tax if they derive from chargeable assets

Compensation for severance or injurious affection is paid for a fall in the value of land you retained caused by the compulsory purchase. This is treated as giving rise to a part disposal of that retained land concerned. Any resulting gain or loss is calculated in the normal way, subject to the rules for small part disposals.

5. Part disposals — alternative basis of calculation

Where part of a holding of land is disposed of, it’s necessary to apportion the allowable cost of the land and any other allowable expenditure, between land sold and land retained, in order to calculate the gain or loss arising. The statutory rules for doing this require a valuation of the land retained. In order to avoid the need for this, HMRC will usually accept an alternative basis of apportioning the expenditure.

Under the alternative basis, the land disposed of is treated as a separate asset from the land retained and any fair and reasonable method of apportioning part of the allowable expenditure to it will be accepted. HMRC may insist on the statutory rules if not satisfied that the resulting apportionments are fair and reasonable.

5.1 Example 5

Part of a holding in land which was acquired in 1975 is sold in May 2022 for £50,000. The market value at 31 March 1982 of that part was £20,000. The costs of disposal were £2,000.

The gain using the alternative basis is calculated as follows: the sale proceeds of £50,000, minus the market value at 31 March 1982 (£20,000) and the costs of disposal (£2,000), giving a chargeable gain of £28,000.

If the alternative basis is not used it would be necessary both to value the whole property at 31 March 1982, and to value the whole of the land retained at the date of the sale.

6. Small part disposals

To determine the cost of the land retained, the cost of the part disposed of is deducted from the total cost. Once the statutory rules have been applied to a part disposal of a holding of land, they also have to be applied to subsequent disposals.

Where you’ve disposed of part of a holding of land you may elect, if certain conditions are met, that it should not be regarded as a disposal and that the consideration you’ve received should instead be deducted from the allowable cost of the rest of the holding. On a later disposal, or part disposal, of the remainder of the holding, only the reduced expenditure is taken into account in calculating any subsequent gain or loss. The main conditions, which must all be met, are the:

• amount or value of the disposal does not exceed:
  • 20% of the market value of the holding, and
  • £20,000
• total amount or value of all disposals of land you’ve made in the year does not exceed £20,000
• holding of land must not be a wasting asset (a typical example of land which is a wasting asset is a lease with no more than 50 years to run)

If you wish to make an election for this relief in the Capital Gains Tax summary pages of your tax return, enter code ‘OTH’ in box 8, 20 or 28 and provide details of the election in the ‘Any other information’ box, box 54, or in your computations, providing a clear statement that you’re electing for this treatment and claiming relief.

7. Valuations of land

You may need a valuation to calculate the gain or loss arising when you dispose of an interest in land. The main circumstances where this will be so are where either:

• the land was owned at 31 March 1982
• the disposal is not by way of a bargain made at arm’s length
• the disposal is to a person with whom you’re connected
• there has been a disposal of part of a holding of land and the alternative basis for calculating the allowable cost isn’t being used

If you’ve used any valuation to calculate any gain or loss in the Capital Gains Tax summary pages, put ‘X’ in box 53 and provide details of the valuation in the ‘Any other information’ box, box 54, or in your computations, whether you’ve prepared your own estimate of the value, or have taken professional advice.

If you’ve already asked for form CG34 Post-transaction valuation checks for capital gains, to check any of the valuations you’ve used in your calculations, put a note to that effect in the ‘Any other information’ box, box 54, or in your computations.

In each case your valuation must be of the asset you owned as it was at the date of valuation. This can affect the basis of valuation.

7.1 Valuation at 31 March 1982

Your valuation should not be on a like-for-like basis. If the land has been substantially altered since 31 March 1982, (such as by further building work) the valuation must still be based on the state of the land on 31 March 1982.

Similarly, you may dispose of a property with vacant possession but if it was occupied by tenants at 31 March 1982, it must be valued taking account of the tenancies. The opposite applies if the property was sold with tenants in occupation; it should still be valued with vacant possession at 31 March 1982, if it was in fact vacant at that date.

7.2 Joint ownership

If you own land with one or more other persons, any valuation will need to take account of this. The valuation has to be of your interest, which in this case is an undivided share in the property. In view of the difficulties inherent in selling such a share, this will normally mean that the value is less than a proportionate share of the value of the entire property. Therefore, for a property that is equally owned by 2 people, the valuation for each of them would normally be less than one half of the value of the entire property. Different rules can apply for land held as a partnership asset so look at the appropriate helpsheet if this applies.

7.3 Post transaction valuation checks

To ask HMRC to check your valuations before you make your tax return, complete form CG34 for each valuation you want checked. The notes attached to form CG34 give more information about this service.

8. Business assets

If you beneficially own buildings or structures which you’ve used in a qualifying activity, you may have claimed Structures and Buildings Allowance (SBA). When you make a disposal of that land, you need to take account of the SBA claimed when working out your gain or loss. You do not need to take account of SBA where:

• the transfer is treated as giving rise to neither a gain nor a loss, for example transfers between spouses
• you make the transfer when incorporating your business so that incorporation relief applies — find out more about when incorporation relief applies

SBA is given in respect of the qualifying buildings and structures, but not the land itself. However, for Capital Gains Tax purposes, the land and the buildings or structures situated on that land are a single asset. This means the Capital Gains Tax position differs depending on your type of interest in the land.

8.1 Disposals of freehold land that includes a qualifying building or structure

The amount of SBA actually claimed is added to the consideration. If there are any changes required to the consideration (such as if it’s replaced with market value), these changes are made before the SBA is added to the consideration.

Example 6

A property investor builds an office block for £100 million and claims SBA for 5 years, receiving total relief of £10 million as a deduction in calculating the profits of the property business. The property is then sold for £120 million.

Without any claim for SBA, the calculation would be as follows: the consideration received (£120 million) minus the Capital Gain base cost (£100 million), giving a capital gain of £20 million.

However, where relief in the form of SBA has already been provided for £10 million of the cost, the calculation is as follows: the consideration received, plus the SBA claimed (£120 million + £10 million), minus the Capital Gains Tax base cost (£100 million), giving a chargeable gain of £30 million.

If you hold the freehold of land including a qualifying building or structure that you paid for and then you grant a lease of 35 years or more, the lessee may instead be entitled to claim the SBA.

Where you have leased the land to a connected person who has been entitled to claim the SBA, when you make any future disposal of the land, such as granting another lease or selling the freehold of the land, your costs for the qualifying building or structure will be reduced by the amount of SBA given to the lessee.

8.2 Disposals of leased land that includes a qualifying building or structure

Under Capital Gains Tax rules, a lease of land with no more than 50 years left to run is a wasting asset. This means that the lessee’s allowable expenditure in respect of that lease is wasted. The wasting of allowable expenditure doesn’t apply where the lessee can claim capital allowances, such as SBA, in respect of the lease.

Ordinarily the person that incurs any qualifying expenditure for capital allowances purposes is the person that can claim the capital allowances. If the lease that is granted by the lessor is:

• longer than 35 years, and
• the market value of the retained interest is less than one third of the capital sum paid for the interest,

then the lessee will be the person entitled to claim the SBA (instead of the lessor).

The lessee may incur their own qualifying expenditure for SBA purposes, such as:

• building a qualifying building or structure on leased land
• modifying an existing qualifying building or structure that they are leasing

Where the lessee disposes of the lease mid-term, the SBA claimed is added to disposal proceeds, but wasted on the same basis that the acquisition cost is wasted. Any subsequent lessee is entitled to claim any remaining SBA up to the expiration of the lease.

If the lessee holds a lease until its natural end, there will be a deemed disposal of the lease when it ends.

Where the lessee incurs SBA qualifying expenditure, the Capital Gains Tax computation will result in a capital loss in respect of any qualifying expenditure not already relieved by SBA.

The lessee may be in a position where SBAs are available for only a proportion of their allowable expenditure. In this situation two separate Capital Gains Tax calculations will need to be made to compute the chargeable gains. The disposal proceeds (if any) and the allowable expenditure will need to be apportioned by reference to the amount of expenditure that has qualified for SBAs. For the calculation of the chargeable gain that includes the expenditure that qualified for SBAs, the amount of SBA received is added to the apportioned disposal proceeds (if any).

Example 7

A company leases bare land for 80 years, paying a capital premium of £20 million. The company builds (at its own expense) a factory on the land for £100 million, all of which qualifies for SBA. The company claims SBA for 40 years, receiving total relief of £80 million as a deduction in calculating the profits of the company. The company then disposes of the lease of the land and building to a third party for a combined total of £60 million.

1. The apportionment of expenditure by reference to capital allowances is calculated as follows: the of capital cost of bare land lease (£20 million) plus the capital cost to build factory (£100 million), giving the total expenditure (£120 million). The expenditure on which capital allowances (SBA) have been given is £80 million and the expenditure on which capital allowances have not been given is £40 million.

2. The apportionment of consideration in the same proportions is calculated as follows: the building cost (£60 million × 80 million ÷ 120 million = £40 million) plus the land cost (£60 million – 40 million = £20 million), giving the total consideration (£60 million).

3. The Capital Gain computation for building is calculated as follows: the consideration received (£40 million) plus the SBA claimed (£80 million), minus the apportioned cost (£80 million), which leaves the chargeable gain (£40 million).

4. The Capital Gain computation for land is calculated as follows: the consideration of £20 million, minus the wasted apportioned cost of £38.2 million (£40 million × (100 – 95.457) ÷ 100), giving a loss of £18.2 million.

When a qualifying building or structure is demolished, the demolition of the qualifying building or structure is treated as a disposal of that qualifying building or structure (but not the land itself), if you:

• hold a leasehold interest in the land including the qualifying building or structure
• claimed SBA for that qualifying building or structure

The amount of SBA claimed must be added to consideration received on disposal (which will usually be £nil, in the case of demolition). You’ll normally have a loss if you’ve not received SBA for the full cost of the qualifying building or structure.

Example 8

A company leases bare land for 40 years. The company builds, at its own expense, a power plant on the land for £100 million and claims SBA for 40 years, receiving total relief of £80 million as a deduction in calculating the profits of the company. The power plant is then demolished at the end of the 40-year lease.

This would be calculated as follows: the consideration received plus SBA claimed (£0 + £80 million) minus the cost of power plant (£100 million), giving a loss of £20 million.

You can make an election for this treatment not to apply. The election needs to be made in writing on or before the first anniversary of 31 January following the year of assessment in which the demolition occurred. For a demolition taking place in the period 6 April 2022 to 5 April 2023 the election must be made by 31 January 2025. Any such election is irrevocable.

You can make the election in the ‘Any other information’ box, box 54, or in your computations, providing a clear statement that you’re making this election. The election needs to clearly identify the qualifying building or structure that it relates to and the date of the demolition.

8.3 Capital contributions

You may receive SBA for making a capital contribution to the cost of a building or structure, that would qualify if you owned that building or structure. You may make a claim for an allowable loss equal to the unclaimed allowance amount, if you receive SBA in this situation and both of the following apply:

• the building or structure you contributed to is demolished
• you have no interest in that building or structure

The unclaimed allowance amount is the amount of the capital contribution less the SBA you already received.

If you want to claim this relief in your tax return, the Capital Gains summary, enter code ‘OTH’ (or ‘MUL’ if more than one code applies) in box 20 and provide details of the claim in the ‘Any other information’ box, box 54, or in your computations, providing a clear statement that this relief is being claimed. The claim needs to provide information identifying the building or structure by reference to which the contribution allowance was given and specify the unclaimed allowance amount.