Disposal of a lease
Long lease v short lease
Disposal of a long lease
Example 1 – Disposal of a long leasehold flat
Simon purchased three leasehold flats as an investment. The flats have always been let out. He decides to sell one of the flats to release some capital. At the time of disposal, the lease has 91 years to run.
In 2006, Simon paid a premium of £150,000 to acquire the lease. He disposes of it in March 2014 for a premium of £190,000. The incidental cost of acquisition and disposal are £5,000. Simon makes a chargeable gain of £35,000 (i.e. £190,000 – (£150,000 + £5,000)).
Assuming Simon is a higher rate taxpayer and has already utilised his annual CGT exemption for the year, he will be liable to pay CGT of £9,800 on the disposal (i.e. £35,000 @ 28%).
Disposal of a short lease
The disposal of a short lease (i.e. one with a remaining term of 50 years or less at the date of disposal) is more complicated. This is because a short lease is regarded as a ‘wasting asset’. However, it does not waste uniformly over time as the rate of decline in value increases as the remaining term decreases. As a result, special rules apply to determine the amount of the allowable expenditure that is wasted, as the wastage does not occur on a straight line basis. The rules apply if the lease was a short lease at the date of disposal, regardless of whether the lease was a long lease with more than 50 years to run at the time at which it was acquired.
Thus the short lease rules apply if there are less than 50 years remaining upon disposal of the lease, even if the lease was a long lease when it was acquired.
The allowable expenditure is reduced under special rules to take account of the fact that the asset is a wasting asset.
As regards acquisition expenditure, the amount that is excluded is the fraction given by the formula:
P(1) – P(3)
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P(1)
Where P(1) is the percentage from the table below at the beginning of the period of ownership and P(3) is the percentage applying at the time of disposal.
Where expenditure has been incurred during the lease which enhances the value of the lease, the enhancement expenditure is reduced by the fraction:
P(2) – P(3)
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P(2)
Where P(2) is the percentage applying at the date that the enhancement expenditure was incurred.
The table (from TCGA 1992, Sch 8, para 1) is as follows:
Years remaining |
Percentage |
Years remaining |
Percentage |
50 (or more) |
100 |
25 |
81.100 |
49 |
99.657 |
24 |
79.622 |
48 |
99.289 |
23 |
78.055 |
47 |
99.902 |
22 |
76.399 |
46 |
98.490 |
21 |
74.635 |
45 |
98.059 |
20 |
72.770 |
44 |
97.595 |
19 |
70.791 |
43 |
97.107 |
18 |
68.697 |
42 |
96.593 |
17 |
66.470 |
41 |
96.041 |
16 |
64.116 |
40 |
95.457 |
15 |
61.617 |
39 |
94.842 |
14 |
58.971 |
38 |
94.189 |
13 |
56.167 |
37 |
93.497 |
12 |
53.191 |
36 |
92.761 |
11 |
50.038 |
35 |
91.981 |
10 |
46.695 |
34 |
91.156 |
9 |
43.154 |
33 |
90.280 |
8 |
39.399 |
32 |
89.354 |
7 |
35.414 |
31 |
88.371 |
6 |
31.195 |
30 |
87.330 |
5 |
26.722 |
29 |
86.226 |
4 |
21.983 |
28 |
85.053 |
3 |
16.959 |
27 |
83.816 |
2 |
11.629 |
26 |
82.496 |
1 |
5.083 |
|
|
0 |
0 |
Example 2 – Disposal of a short lease
Caroline acquires a leasehold flat in 2008 for a premium of £90,000. At that time, the lease had 51 years remaining. She disposes of the lease in 2014, assigning it for a premium of £120,000. The flat was let out for the entire period of ownership.
At the time of disposal, the lease had 45 years left to run and consequently the lease is a short lease at the time of disposal, and the allowable expenditure is reduced by the fraction:
P(1) – P(3)
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P(1)
P(1) is 100%, as at the time of acquisition the number of years remaining on the lease is more than 50.
P(3) is 98.059 (the percentage in the above table applying to a lease with 45 years to run).
The allowable expenditure is computed as follows:
£
Premium paid for lease 90,000
Reduction
100 – 98.059 x £90,000 (1,747)
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