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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15950
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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My company purchased a shop lease (12.5 years on the lease

Customer Question

My company purchased a shop lease (12.5 years on the lease when we bought it. The lease premium was £48k and the fixtures and fittings for £15k). I subsequently spent £23k on improvements.
I am due to sell the lease in the next few weeks. The value of the sale will be £100k, with £80k for the lease and £20k for the fixtures and fittings.
My questions are these:
1. How should the shop lease be shown in the company accounts? Is it as an asset? The accounts currently show the entire £40k of the lease premium as an asset.
2. What is the tax treatment for the sale of the lease? Does it give rise to a capital gain, and if so, can the capital gain be sheltered by the trading losses that the business is already making?
Many thanks
Tyler
Submitted: 1 year ago.
Category: Tax
Expert:  TonyTax replied 1 year ago.

Hi. My name is*****'m looking at your question now and will post my answer or ask for more information here in a short while.

Expert:  TonyTax replied 1 year ago.

1 As the lease had less than 50 years to run when your company bought it, it is a wasting asset but as in your case a wasting asset can increase in value. The lease is a balance sheet item.

2 There may or may not be a capital gain on the sale of the lease. As it is a wasting asset, the amount of the allowable expenditure which can be used as the "cost" for CGT purposes reduces in line with the table here. Trading losses of the accounting period in which a capital gain in made can be relieved against the gain. Trading losses brought forward from an earlier period cannot be relieved against the gain. Look here for information on losses.

With regard to the leasehold improvements, the cost of some of these may have been claimed as revenue expenditure or capitalised and claimed as capital allowances. See section 7 here on enhancement expenditure. Where the enhancement expenditure is not reflected in the leases value when it is sold, it cannot be used in the calculation of the capital gain.

I hope this helps but let me know if you have any further questions.

Customer: replied 1 year ago.
34;With regard to the leasehold improvements, the cost of some of these may have been claimed as revenue expenditure or capitalised and claimed as capital allowances. See section 7 here on enhancement expenditure. Where the enhancement expenditure is not reflected in the leases value when it is sold, it cannot be used in the calculation of the capital gain."The sale consists of two parts - the lease part and the fixtures and fittings. Are you saying that money I have spent on the fixtures and fittings since I have purchased the shop (say for example I have spent £23000 on improving the fixtures and fittings) that cannot be used in the calculation of the total gain?So in this case, I bought the F&F for £15k
I spent £23k on improving the F&F (and capitalised £11k of these on the balance sheet)
I am going to sell the F&F for £20k (so making a slight loss on that side)So the is the capital gain £20k (sale value of F&F) - £13k (cost of the F&F) - £11k (cost of the improvements to the F&F which have been capitalised)?And if the capitalised improvements of £11k have been depreciated, do I take the full £11k as a deduction, or the amount remaining on the balance sheet?Many thanks for your helpTyler
Expert:  TonyTax replied 1 year ago.

Have you claimed capital allowances or a deduction from profits for any part of the £23,000 apart from depreciation?

Customer: replied 1 year ago.
No capital allowances have been claimed as we are making a trading loss.
Expert:  TonyTax replied 1 year ago.

I'm assuming that you would have added back the depreciation on the capitalised fixtures and fittings improvements so the loss on the fixtures and fittings is £18,000 (£20,000 - £15,000 - £23,000).