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Dont go to pieces over leases
Claire Oglesby explains all you need to know about leases in the form of some top tips
A great many students seem to struggle with the different aspects of leases when they arise in tax exam questions, so here are some key tips.
Leases can be long or short, assigned (sold) or granted. Transaction in leases can also be chargeable to capital gains tax (CGT) or a mixture of CGT and income tax. You need to remember that a short lease is a lease expected to last 50 years or less. If a short lease is granted, the premium will be split and part will be chargeable to income tax and part to CGT.
So how can you remember the different treatment of sales and grants of long and short leases?
When there is a sale of a lease there is a normal capital gains tax disposal you are disposing of all of your interest in the property. When there is the grant of a sub-lease you generally have a part disposal to calculate (with exception of the grant of a short sub-lease out of short head-lease) you are only disposing of a few years of your interest in the property and the property will revert to you again at the end of the sub-lease you have granted. Hence you will be given the value of the reversionary interest to use in your part disposal formula.
Where you are either selling (assigning) a short lease or granting a short sub-lease out of a short head-lease (no mention of long lease), you need to use your tax tables. From the tax tables you will take the relevant lease depreciation percentages and apportion the cost by an appropriate fraction.
When you are selling a short lease you will take the lease percentage for the years remaining on the lease at Sale and divide this by the years on the lease at Acquisition, remember this by taking the first two letters of SALE.
When you are granting a short sub-lease out of a short head-lease you will apportion the lease percentage for the head-lease years remaining at Grant of the sublease, deduct the percentage for the head-lease years remaining when the sublease Runs out, then divide by the years remaining when the head-lease was Acquired. I remember these as the first three letters of GRANT.
If some of the premium has already been subject to income tax (where a short lease has been granted) we need to strip out the income element to leave the capital part.
The proceeds for your calculation where there is a grant of a short sub-lease out of a long head-lease or freehold will therefore be just the capital element, even though the full premium joins the reversionary interest on the bottom of the part disposal calculation. However, the proceeds for the grant of short sub-lease out of a short head-lease calculation will use the full proceeds but include a deduction for the already charged income element after the apportioned cost has been deducted. This cannot create a loss.
Claire Oglesby is a senior tutor at Tolley Exam Training, part of Lexisnexis, and can be contacted at firstname.lastname@example.org. The views expressed are her own
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