CG71016 - Leases: grant of lease out of short lease: restriction of capital loss
TCGA92/Sch 8/Para 6 (1)
Where:
- a short lease is granted out of a short lease;
- a capital loss arises; and
- the holder of the original lease is entitled to relief under ITTOIA05/S292 or CTA09/S232, see PIM2320,
the allowable loss is restricted by the amount of the relief given under ITTOIA05/S292 or CTA09/S232.
The operation of TCGA92/Sch 8/Para 6 (1) cannot convert a loss into a chargeable gain. Where the relief given under ITTOIA05/S292 or CTA09/S232 exceeds the loss, the result is no gain/no loss.
Example
Miss P acquired a 40 year lease on a property, paying a premium of £300,000. She attempted to sub-let the property, but had difficulty in finding a tenant. Five years later she granted a 21 year sub-lease of the property for a premium of £50,000. The rent payable under the sub-lease was the same as that payable under the original lease.
The computation of the loss accruing to Miss P is as follows:
Deduction for premium paid
Prior to the grant of the sub-lease, Miss P was entitled to a deduction under ITTOIA05/S292 or CTA09/S232, see PIM2320, of £1,650 for each year.
Premium on grant of sub-lease 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
=£50,000 - [ (50 - 20) / 50 ]
= £50,000 x 0.6
=£30,000
Total deductions from the rent under ITTOIA05/S292 or CTA09/S232 over the term of the sub-lease
= £1,650 x 21 = £34,650
less £30,000 (premium received on grant of sub-lease)
= £4,650
Allowable expenditure on the grant of the sub-lease
Expenditure x [ (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 40 years: 95.457
C - Percentage for 35 years: 91.981
D - Percentage for 14 years: 58.971
Expenditure x [ (C - D) / P(1) ]
= £300,000 x [ (91.981 - 58.971) / 95.457 ]
= £103,744
Calculation of loss
Premium £50,000
Less allowable expenditure £103,744
(£53,744)
Add back deductions allowable
Loss (£53,744)
Plus total deductions from the rent under ITTOIA05/S292
or CTA09/S232 over the term of the sub-lease £4,650
(£49,084)
Miss P’s loss has therefore been reduced from £53,744 to £49,084.
The addition of allowable deductions cannot convert a loss to a gain. The most it can do is reduce a loss to nil.