CG71371 - Leases: commutation of rent: landlord is leaseholder under short lease

Once again, the example which follows would be equally applicable to the situation where the payment was made for the variation or waiver of one or more of the terms of the lease.

On 31 October 2013, Mrs J acquired a 45 year lease over a property in return for the payment of a premium of £50,000. The rent payable under this lease was £5,000 a year.

On 31 October 2017, she granted a 21 year sub-lease over the property in return for a premium of £40,000. The rent payable under the sub-lease was £5,000 a year. One of the terms of the sub-lease was that the tenant could commute the rent for any period on the payment of a lump sum.

On 31 October 2019, the tenant exercised the right to commute the rent and paid £35,000 to Mrs J. As a result, no further rent was payable for the remaining 19 years of the sub-lease.

The gains accruing to Mrs J on the grant of the sub-lease and on the receipt of the capital payment are as follows.

Note: the gain on the original grant of the sub-lease is not recomputed in these circumstances when the capital payment is received.

1. Gain arising on grant of sub-lease.

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.

= £40,000 x [(50-20) / 50]

= £40,000 x 0.6

= £24,000

Allowable expenditure

See CG71001-CG71002.

The allowable expenditure which is to be deducted is that part of the total allowable expenditure which will waste away over the term 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 45 years: 98.059

C - Percentage for 41 years: 96.041

D - Percentage for 20 years:

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

= £50,000 x [(96.041 - 72.770) / 98.059]

= £11,866

Chargeable gain

Premium received £40,000

Less amount chargeable as property income £24,000

Less allowable expenditure £11,866

£4,134

Gain arising on commutation payment.

Amount chargeable as property income

The capital sum received by Mrs J is treated as a premium payable in respect of a 19 year sub-lease of the property (the remaining term of the sub-lease when the capital sum is paid).

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

= £35,000 x [(50 - 18) / 50]

= £22,400

Allowable expenditure

see CG71001-71002.

The allowable expenditure which is to be deducted is that part of the total allowable expenditure which will waste away over the period of the sub-lease. However, that expenditure has already been allowed in computing the gain arising on the original grant of the sub-lease and therefore no deduction is due when computing the gain arising from the commutation payment.

Chargeable gain

Disposal proceeds £35,000

Less amount chrgable as property income £22,400

Less allowable expenditure £0

£12,600