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bigduckontax
bigduckontax, Accountant
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If a lease is taken out by a company on a freehold property

Resolved Question:

if a lease is taken out by a company on a freehold property it has been using is owner of the property then liable for capital gains tax
Submitted: 2 months ago.
Category: Tax
Expert:  bigduckontax replied 2 months ago.

Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.

Yes, the owner will be liable for Capital Gains Tax (CGT) on the grant of a lease depending on whether it is a long or a short lease..

The ACCA gives an excellent explanation here:

GRANT OF A LONG LEASE

Where a freeholder grants a long lease to a tenant, CGT is calculated by using the part-disposal formula:

The allowable cost is the acquisition cost multiplied by the fraction A/(A+B), where:

  • ‘A’ is the gross amount of the premium paid
  • ‘B’ is the value of the remainder or the reversionary interest.

For example:

Example 3

Rose grants a 55-year lease on a freehold property which she purchased in 2000 for £100,000.

She receives a premium of £150,000 from the leaseholder. The value of the freehold reversion is £200,000.

The capital gain is therefore:

Premium: £150,000

Allowable cost:

100,000 x 150,000/(150,000+200,000) (42,857)

Gain: £107,143

GRANT OF A SHORT LEASE

The premium received from the grant of a short lease must be split between the amount chargeable to income tax (under property income rule ITTOIA 2005 S 277 (4)) and the amount chargeable to CGT.

The capital element chargeable to CGT is 2 per cent x (N-1) x P, where:

  • ‘N’ is the number of years of the lease
  • ‘P’ is the premium received.

The grant of a lease out of a freehold is treated as a part-disposal; accordingly, allowable cost is calculated as the acquisition cost multiplied by the fraction a/(A+B), where:

  • ‘A’ is the gross premium paid
  • ‘B’ is the reversionary interest
  • ‘a’ is the part of the premium that is chargeable to CGT.

For example:

Example 4

Elizabeth bought a freehold property 20 years ago for £50,000. In 2010, she granted a 40-year lease for a premium of £100,000, the reversionary interest being £200,000.

We first need to split the premium of £100,000 into the amount subject to income tax and the amount subject to CGT:

The capital element is 2% x (40-1) x £100,000 = £78,000.

The amount chargeable to income tax (as property income) is the difference between the premium received and the amount charged to CGT (£100,000-£78,000 = £22,000).

The capital gain is as follows:

Capital element of the premium: £78,000

Less allowable cost:

50,000 x 78,000/(100,000+200,000) (13,000)

Gain: £65,000

I do hope that you have found my reply of assistance.

bigduckontax and other Tax Specialists are ready to help you
Customer: replied 2 months ago.
the company was formed recently with my wife and daughter.my wife and i own the whole of the property.we live on the first floor and my wife owns the shop and business on the ground floor.we bought it 25 years ago for 170,000.the lease for the retail area would be for 40 years. could you tell us if this is liable for CGT and roughly how much
Expert:  bigduckontax replied 2 months ago.

Thank you for your support.

I will respond further in a moment

Expert:  bigduckontax replied 2 months ago.

I need to know the premium paid and the reversionary interest in the property.