CG71007 - Leases: grant of lease out of short lease: sub-lease at higher rent

TCGA92/Sch 8/Para 4 (2) (b)

When a sub-lease is granted out of an existing lease, the rent payable under the sub-lease may be higher than the rent payable under the original lease. In such circumstances, the premium chargeable for the sub-lease will usually be lower than it would have been if the rental terms of the sub-lease had been the same as those of the original lease.

Where this is the case, and both the sub-lease and the original lease are short leases, the amount of the expenditure allowable under TCGA92/S38 (1)(a) and (b) is reduced.

Initially, the expenditure is calculated in the manner set out in CG71001. This amount is then multiplied by the fraction:

Actual premium / Notional full premium

The ‘notional full premium’ is the premium which would have been received if the rent payable under the sub-lease had been the same as the rent payable under the original lease.

If the rent payable under the sub-lease is less than the rent payable under the original lease, there is no corresponding increase in the allowable expenditure on the grant of the sub-lease.

If you meet a case in which the rent charged under the sub-lease is greater than the rent payable under the original lease, you should obtain, by way of a memo setting out the full facts, the Valuation Office Agency’s opinion of the ‘notional full premium’.

Example

Mrs V paid a premium of £200,000 to acquire a 30 year lease over a property. Five years later she granted a sub-lease for 10 years over the whole property. The rent payable under the original lease was £8,000 per year; the rent payable under the sub-lease was £10,000 per year.

Mrs V received a premium of £120,000. The Valuation Office Agency stated that the notional full premium would be £150,000.

Step 1: Allowable expenditure if sub-lease rental payments were the same or less than lease rental payments

As per CG71001:

Expenditure x [ (C - D) / P(1) ]

If the sub-lease had required the same rental payments as the original lease, Mrs V’s allowable expenditure on the grant of the sub-lease would have been:

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;

C is the percentage derived from the table in TCGA92/Sch 8/Para 1 (6) for the remaining term of the lease when the sub-lease was granted;

D is the percentage derived from the table in TCGA92/Sch 8/Para 1 (6) for the remaining term of the lease when the sub-lease expires.

The percentages which are required from the table in TCGA92/Sch 8/Para 1, see CG71141, are:

P (1) - Percentage for 30 years: 87.330

C - Percentage for 25 years: 81.100

D - Percentage for 15 years: 61.617

Expenditure x [ (C - D) / P(1) ]

£200,000 x [ (81.100 - 61.617) / 87.330 ]

= £44,620

Step 2: Allowable expenditure as sub-lease rental payments are more than lease rental payments

Allowable expenditure x (Actual premium / Notional full premium)

=£44,620 x (£120,000 / £150,000)

=£35,696