CGT 7&8,9 - Sales & Grants of Leases

Question 1

A lease is

Answer 1

the right to use an asset, generally land or buildings, for a specified time

Question 2

A lease is an asset that can be …

Answer 2

sold (assigned).

Question 3

What happens if you sell / assign a long lease?

Answer 3

Normal CGT comp

Question 4

What is a long lease?

Answer 4

more than 50 years at sale

Question 5

What happens if you sell / assign a short lease?

Answer 5

Normal CGT Comp
BUT

Cost = original cost × S/P

S = % for years left at sale
P = % for years left at purchase

Think of this as the percentage of the years you had originally that you still have left multiplied by the cost. So your cost is going to reduce. So your gain is going to increase.

Which makes sense because if you are selling a lease that you had for 20 years and now it’s only got 10 years but you’re selling it at the same price, you’re winning.

Question 6

The grant of a lease is the….

Answer 6

creation of a new asset.

Question 7

A new lease can be granted out of …..
This is treated as….

Answer 7

a longer lease or a freehold.
a part disposal of the underlying land and buildings.

Question 8

If you sell a long lease, this is treated as…

Answer 8

a part disposal. So you do it under normal part disposal rules. The question should tell you about the ‘reversionary interest’ - that just means the value that’s left excluding the lease. The premium - well that’s the value of the lease. So you add together the two and figure out what percentage is premium. Then you multiply that by your original cost to get the base cost of that part.

Question 9

If you sell a short lease…..

Answer 9

this is more complicated.

You need to split the elements between capital and income. To get the capital element, you do you 2% x lease premium x (years left - 1). The rest is income.

You then take your capital element and divide it up further in the same way you would calculate a long lease under the part disposal rules. You just treat the capital element as if it were the premium.

Question 10

A lease is deemed to end on the earliest of:

Answer 10

• expiry of the lease under the terms of the agreement; or
• first date on which the landlord may terminate the lease; or
• first date beyond which the lease is unlikely to continue

Question 11

The treatment of enhancement expenditure on property held under a lease depends on the number of years the lease has to run at the date of sale.

Answer 11

1. If > 50 years to run: Enhancement expenditure treated in normal way.
2. If lease has ≤ 50 years to run: Allowable expenditure must be depreciated using the formula S/P

S = years left at date of disposal.
P = years left when enhancement expenditure was incurred.

Question 12

,Short sub lease granted out of short head lease

Answer 12

Proceeds = Full premium
Cost is adjusted using (s − x)/y
s = years left at date sub-lease granted;
x = years left at date sub-lease expires; and
y = years left at date head-lease is granted.

Deduct amount assessed as property income from chargeable gain.
Where a business tenant sub-lets a property, cost is also reduced by amounts of the
original premium relieved against trading income.
Where a sub-lease is granted and rents under the sub-lease exceed those under the head-lease, the allowable cost for CGT purposes is given by: Cost × (Actual premium/Notional premium) The ‘notional premium’ is the premium that would have been due had the rents been the
same.