CG70774 - Leases: sale and leaseback

If a freehold or leasehold interest in land is disposed of, on terms which include the provision that the purchaser will grant a lease of the whole or part of the land in question to the vendor, that should be treated as a part-disposal by the vendor. It should not be treated as two separate disposals, one by the vendor and one by the purchaser, see Sargaison v Roberts 45TC612.

The value of the interest which is retained by the vendor is the market value of the lease granted by the purchaser.

It is possible that a charge arises under ITTOIA05/S285 or CTA09/S225, see PIM1226. Note a charge does not arise if the lease is granted and begins to run within one month of the sale.

The way in which gains are computed in such cases is illustrated by the examples below. Note for companies, indexation may also be due.

Example 1 - Sale of Freehold and Leaseback

On 30 June 2015, Mr M bought the freehold of a property for £600,000. On 30 June 2020, he sold the property for £800,000 plus the grant of a 25-year lease at a rent of £100,000 a year.

The Valuation Office Agency reported that the market value of the lease was £300,000.

The gain accruing to Mr M is calculated as follows:

Disposal proceeds

£800,000

Allowable expenditure

Acquisition Cost x A/(A+B)

A is the disposal consideration

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

= £600,000 x 800,000/(800,000+300,000)

= £436,364

Chargeable gain

Disposal proceeds £800,000

Less allowable expenditure £436,364

£363,636

Example 2 - Sale of short lease and leaseback

On 30 June 2012, Mrs H paid a premium of £200,000 to acquire a 55-year lease on a property. The rent payable was £80,000 a year. On 30 June 2020, she assigned the lease in return for a payment of £250,000 plus the grant of a 25-year sub-lease of the property at a rent of £80,000 a year.

The Valuation Office Agency reported that the market value of the sub-lease was £100,000.

The gain accruing to Mrs H is calculated as follows.

Disposal proceeds

£250,000

Actual expenditure

= £200,000

Since the lease had less than 50 years to run at the date of the part disposal, the expenditure needs to be ‘wasted’ in accordance with TCGA92/Sch 8/Para 1, see CG71144.

Amount of expenditure to be excluded (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.

Amount of expenditure to be excluded:

= (100-98.902)/100 x £200,000

= £2,196

Allowable expenditure

Total allowable expenditure x A/(A+B)

A is the disposal consideration

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

= (£200,000 - £2,196) x 250,000/(250,000+100,000)

= £141,289

Chargeable gain

Disposal proceeds £250,000

Less allowable expenditure £141,289

£108,711