Chapter 14 Grants of Leases Flashcards
grants of leases
The grant of a lease is the creation of a new asset. If an individual who owns the freehold grants a lease to a tenant, the freeholder has created a new asset and will regain the property rights when the new lease comes to an end. In return for occupation the tenant will pay the freeholder a sum of cash (premium). The premium is a capital sum and will be charged to CGT in the hands of the freeholder. The gain is calculated by treating the grant of a lease as part disposal of the freehold.
Granting a long lease – this is a lease for over 50 years, the gain is calculated by:
Allowable cost = A/ (A+B) x acquisition cost
(A is the gross amount of the premium paid and B is the value of the remainder (the reversion or the reversionary interest)).
The reversion consists of two things. The first is the capital value of the property when it reverts back to the freeholder (when lease expires). The second is the right to receive future rents under the lease.
Granting a short lease – if a landlord receives a premium for the grant of a short lease, part of that premium is chargeable to income tax as property income. The remainder of the premium is chargeable to income tax as property income. The remainder of the premium is chargeable to capital gains tax.
Capital element = 2% x (N-1) x P
(P is the premium received; N is the number of years of the lease).
Having identified the amount of premium chargeable to capital gains tax, we calculate the resulting capital gain using the part disposal rules, this time the formula changes slightly.
There is an alternative method, you use the P x ((51 – Y)/50) where P is the amount of premium and Y is the number of complete years of the lease. This shows the amount chargeable to income tax, then you can figure out how much is charged to CGT.
We next calculate the allowable cost. The grant of a lease out of a freehold, is treated as a part disposal. However, when we are dealing with the grant of a short lease, we use a slightly modified formula:
a/(A+B) x acquisition cost (A is the gross premium chargeable to CGT and B is the capital value of the reversion).
