CG71012 - Leases: grant of lease out of short lease: part of land sub-let

TCGA92/Sch 8/Para 4 (3)

Where:

• a short lease is granted out of a short lease, and
• the sub-lease covers only part of the land covered by the original lease

the amount of the allowable expenditure on the grant of the sub-lease is reduced.

There are a number of stages in the calculation:

i) The amount of the premium chargeable as property income must be calculated, see CG70900P.

ii) The part of the total allowable expenditure attributable to the part disposed of is calculated on A / (A+B) lines, see CG12730P.

iii) The part of the expenditure which will waste away over the term of the sub-lease is calculated, see CG71001.

iv) Any restriction due if the actual premium is less than the ‘notional full premium’ is calculated, see CG71007.

v) All the above factors are combined to calculate the allowable expenditure.

vi) The gain arising can then be computed.

Any valuations which are required should be obtained from the Valuation Office Agency, see CG74000C.

Example

Mr P acquired a 55 year lease over a property in return for a premium of £300,000. The annual rent payable was £50,000. Eight years later he sub-let part of the property on a 21 year lease in return for a premium of £100,000. The annual rent payable under the sub-lease was £20,000.

The Valuation Office Agency stated that:

• the value of the original lease at the date the property was sub-let was £500,000;
• the amount included in the £500,000 which related to the part sub-let was £150,000;
• the notional full premium for the part sub-let would be £120,000.

Amount chargeable as property income:

P x [ (50 - Y) / 50 ]

P is the amount of the premium

Y is the number of complete years (other than the first) in the term of the lease

= £100,000 x [ (50 - 20) / 50 ]

= £100,000 x 0.6

= £60,000

Part of total allowable expenditure attributable to the part disposed:

Total allowable expenditure x A / (A+B)

A is the disposal consideration

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

= £300,000 x £150,000 / (£150,000 + £500,000)

= £90,000

Part which will waste away over the term of the sub-lease:

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

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 55 years: 100

C - Percentage for 47 years: 98.902

D - Percentage for 26 years: 82.496

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

= [ (98.902 - 82.496) / 100 ]

= 0.16406

Restriction where sub-lease at higher rent;

Actual premium / Notional full premium

= (£100,000 / £120,000)

= 0.8333

Allowable expenditure on grant of sub-lease:

= £90,000 x 0.16406 x 0.8333

= £12,305

Gain accruing on grant of sub-lease:

Premium	£100,000
Less allowable expenditure on grant of sub-lease	£12,305
Less amount chargeable as property income	£60,000
	£27,695