Capital Gains Tax: Leases
This Schedule provides rules for computing gains and losses on the granting of leases and on the assignment of leases. A short lease, which as for income tax is a lease granted for a term which does not exceed 50 years, is deemed to be a wasting asset, and a long lease, which is a lease granted for a term exceeding 50 years, becomes a short lease, and thus a wasting asset, when the remainder of its term is reduced to 50 years. While the rules deal mainly with leases of land, they extend, where applicable, to leases of property other than land. The rules cover such matters as leases given out of freehold for a premium, payments made in commutation of rent, for the waiver of the terms of a lease or for the surrender of a lease; the calculation of the proportion of cost to be allowed where there is a short sub-lease out of superior lease; and the adjustments required in the calculation of capital gains where part of a premium, or part of a payment which is deemed to be a premium, is chargeable to income tax or corporation tax under Chapter 8 of Part 4.
par 1 This paragraph defines the term “” as including any like sum whether payable to the immediate or superior lessor. It also provides that any sum (other than rent) paid on or in connection with the giving of a tenancy is presumed to have been paid by means of a premium, except in so far as it shown that other sufficient consideration has been given. It should be remembered that the terms “”, “”, “” and “” are defined for the purposes of the Capital Gains Tax Acts in section 5.
Leases of land as wasting assets: restriction of allowable expenditure
A lease of land which has 50 years or less to run (a short lease) is treated as a wasting asset. Paragraph 2 sets out the rules for determining the proportion of the cost of acquiring the lease which may be set against the consideration received on the assignment of the lease. The cost is to be regarded as wasting away over the period of the lease at the rate set out in the Table at the end of the paragraph. Where a short lease is assigned, only the residue of the remaining expenditure which, in accordance with the Table, remains at the time of the assignment is to be deducted from the consideration received for the assignment.
par 2(1) A lease is not to be regarded as a wasting asset until it has 50 years or less still to run. For this purpose the relevant lease is the head lease, that is, the asset the remainder of which is being disposed of.
par 2(2) A special rule is needed to deal with the case where a lease is acquired subject to an existing sub-lease not at a rent for full value. In such a case, the head lease, even though a short lease, may not really be a wasting asset and its value may increase as the sub-lease draws towards an end. It is provided, therefore, that, if the head lease is subject to a sublease not at a rent for full value of the land and buildings on it and the value of the head lease at the end of the duration of the sub-lease (but estimated at the time when the head lease was acquired) is greater than the consideration paid for the head lease, the head lease is not to be treated as a wasting asset until the end of the sub-lease.
Short lease not treated as a wasting asset
A person, A, took a lease of a shop for 40 years in 1985 at a rent of €5,000 per annum. In 1995 A ceased business and sub-let the premises to B for 10 years at an annual rent of €8,000 per annum. In 2002, A sells his interest in the property to C and because it is expected that by the year 2005 the shop will fetch a rent of at least €11,000 per annum A obtains a price of €58,000 for the sale of his interest. C pays €58,000 for the interest which produces immediately a net income of only €3,000 per annum (rent receivable €8,000 less rent payable €5,000, in the expectation that after 3 years he will be able to increase his net income to €6,000 per annum (rent receivable €11,000 less rent payable €5,000). It is expected that the property will be worth €73,000 in the year 2005. In these circumstances the expenditure by C of €58,000 will not be regarded as commencing to waste until the year 2005 although in 2002 the lease has only 23 years to run.
par 2(3) The rate at which expenditure on a lease of land, which is a wasting asset, is deemed to waste away is to be determined in accordance with the Table at the end of the paragraph instead of at the uniform rate which normally applies to wasting assets (section 560). The percentage figures in the Table decrease in accordance with the normal decrease in the value of a lease with the passage of time, disregarding any change in the value of the property which is the subject of the lease. In general, the manner in which the expenditure is written off under the Table is more favourable to the taxpayer than the straight-line basis since at any point in the Table the residue of original cost will be larger than it would be on a straight-line basis. The figures in the Table are set out as percentages of the value of a 50-year lease. Thus, a 20-year lease is valued at 72.8 per cent of a 50-year lease whereas a 10-year lease is valued at 46.7 per cent of a 50-year lease.
par 2(4) The rules for calculating the proportion of the cost of a short lease and of any further expenditure on improving the property which is to be excluded from the allowable expenditure in the computation of a gain on the disposal of a lease are laid down in mathematical form. The effect of the rule is that the expenditure is to be reduced by the amount by which it has wasted away up to the date of assignment.
The following example illustrates how the rules in subparagraphs (3) and (4) operate.
X purchased for €80,000 a lease of land having 30 years to run and spent a further €8,000 on improvements after 5 years, which immediately became reflected in the value of the land. X sold her interest in the land 15 years after purchase for €70,000. The chargeable gain (disregarding indexation relief under section 556) is computed as follows —
Amount realised on disposal of lease
by the amount not allowable
Expenditure on improvements
by amount not allowable
(Under section 556 the allowable cost of €56,450 indexed from the date of acquisition of the lease and the allowable expenditure of €6,076 on improvements from the date the expenditure was reflected in the nature of the lease.)
par 2(5) The rules set out in the paragraph are to apply even where the head lease was originally granted for a term longer than 50 years. It is made clear, however, that none of the expenditure on the head lease is to be treated as wasting away until the 50 year point is reached. Thus, if a long lease is assigned at a time when the remainder of its term exceeds 50 years, no restriction is to be made in the amount of the qualifying expenditure in calculating any gain or loss on the disposal.
par 2(6) An asset is not to be treated as a wasting asset under this paragraph to the extent that the original purchase price or the expenditure on additions has qualified for capital allowances. Thus, if a person acquires, say, an interest in a factory under a short lease and there is a residue of expenditure at the time of acquisition which qualifies for industrial building allowances, there is no restriction of cost under this paragraph if he disposes of his interest at a later stage before the term of his lease expires. Any case arising under this subparagraph should be submitted to the office of the Chief Inspector of Taxes with a report of the facts, whether or not the person who acquired the interest incurs any further expenditure qualifying for industrial building allowances during that person’s period of ownership of the lease.
par 2(7) If the duration of a long lease is not an exact number of years, the percentage in the Table to the paragraph which is to be used is the appropriate percentage for the whole number of years involved plus one-twelfth of the difference between that percentage and the percentage for the next number of years for each odd month, counting an odd 14 days or more as one month.
Premiums for leases
Paragraph 3 provides that where a premium is taken on the grant of a lease of land, the grant of the lease is treated as a part disposal of the entire interest in the property (whether freehold or leasehold) and, in calculating under the part disposal rules the interest which remains, account is to be taken of the value of the right to receive the rent reserved under the lease.
par 3(1) Where a premium is taken for a lease of land, the granting of that lease is to be treated as a part disposal of the larger interest out of which the lease was granted.
par 3(2) In applying the rule for apportioning expenditure in the case of a part disposal (see section 557), the denominator of the apportionment fraction is to include, as part of the market value of the interest remaining undisposed of, the value of the right to receive rent under the lease.
A has a freehold house, previously let, which cost €100,000 (including allowable expenses). When A obtains vacant possession he grants a lease for 99 years at a premium of €120,000 and a rent of €1,000 per annum. Suppose that the value of the reversion at the time of the grant of the lease is virtually entirely the right to the rent and is valued at €10,000, that is, 10 years rent. Under the part disposal rules the chargeable gain is computed thus —
Cost 100,000 ×
120,000 + 10,000
The chargeable gain is, therefore —
Acquisition cost attributable (disregarding indexation relief under section 556)
The acquisition cost has now been written down to €7,692 (that is, €100,00 – €92,308). If, therefore, the reversion is later sold for €10,000, then, disregarding indexation relief under section 556) there will be a further chargeable gain of €2,308.
Payment during currency of lease treated as premium
Paragraph 4 provides that during the currency of a lease a payment is made in commutation of rent, or for the surrender of a lease, or for the variation or the waiver of the terms of a lease, the payment is to be treated as an additional premium for the grant of the lease and capital gains tax is to be charged on the amount of the payment.
par 4(1) Any sum paid under the terms of a lease of land in commutation of rent or for the surrender of a lease is to be treated as a premium paid for the period in relation to which it is payable.
X gives Y a 30 year lease at a full economic rent of €5,000 per annum. A clause in the lease allows Y to commute the rent for a period of 5 years by paying €25,000 and he does so for the period coming between the sixth and the twelfth years. X is treated both for income tax and capital gains tax as having received a premium of €25,000 for the period of 5 years from the beginning of the seventh to the end of the eleventh year.
par 4(2) A similar rule is provided for any sums paid in consideration of the variation or waiver of any of the terms of a lease.
par 4(3) In a case involving the commutation of rent or the variation or waiver of the terms of the lease (note – not a case of surrender which is dealt with in subparagraph (5)), the payment is to be treated as if it were part of the premium or other consideration given at the time when the lease was granted. Where the lessor is himself a lessee under a short lease, the payment is to be treated as made for the part of the period of the sub-lease to which it relates and, in the computation of the gain or loss on the sub-lease on any disposal by the lessor, of his interest, the payment is to be treated as additional expenditure dating from the date of payment and the appropriate percentage of that expenditure to be allowed is to be determined by reference to the Table in paragraph 2.
par 4(4) Where the payment is in commutation of rent or for the variation or waiver of the terms of the lease, and the lessor’s own lease is either a freehold or a long lease, the gain on the lessor’s disposal is to be recomputed and any necessary adjustment made by assessment, discharge or repayment.
The following example illustrates the manner in which a payment for the variation or waiver of any of the terms of a lease is to be dealt with.
A gives B a lease for 30 years. B is obliged to keep the property in good repair. They arrange a variation under which A becomes liable for the repairs for 5 years and he gets €2,000 as consideration. A is deemed for both income tax and capital gains tax purposes to have received a premium of €2,000 for those 5 years.
The consequences of this for capital gains tax depends on whether or not the landlord is himself a tenant under a short lease or the holder of a longer tenure, namely —
(a) landlord has freehold or long lease
The landlord and the tenant are treated as if the deemed premium had been (or had been part of) the original consideration received by the landlord for the lease. If a premium had been paid on the grant of the lease, the original gain or loss is recomputed (with any necessary adjustments of tax) to provide the proper apportionment of cost and to arrive at the correct charge.
(b) landlord has a short lease
The deemed premium is to be treated as paid for the part of the period of the sub-lease to which it relates and is not to be carried back to the start of the sub-lease, thus —
Payment for waiver
Charge to income under Case V of Schedule D
Charge to income tax
Charge to capital gains tax —
Payment for waiver
(No premium on grant of sub-lease)
Less: Charged to income tax
(see paragraph 6)
The tenant is regarded as having paid the sum in consideration of the grant of the part of the sub-lease covered by the period in respect of which the amount has been paid and in the event of a sub-letting by the tenant it is treated as expenditure by the tenant in enhancing the value of his part of the lease (under section 552(1)(b)).
par 4(5) In a case where a landlord receives a payment for the surrender of a lease which is treated as a premium, such a payment, having been made in order to terminate the lease, cannot be treated as part of the original premium on the grant of the lease. It is provided, therefore, that the payment is to be treated as a premium paid under a separate transaction, that is, as if it were a disposal by the landlord of his interest in the lease and not as an addition to any other premium payable.
X gives Y a lease of land for 25 years at a rent of €5,000 per annum. X’s interest (which is basically the right to receive rent) is valued at €100,000. After 5 years Y surrenders the lease for a payment of €20,000. X is treated as having disposed of his interest in the lease for €20,000. The surrender is a separate transaction (from the first disposal) and, accordingly, the full amount of €20,000 is a chargeable gain, subject to adjustment for the amount charged to income tax (€18,400 or 92 per cent of €20,000) so that the final charge to capital gains tax is €1,600.
par 4(6) Where the terms of a lease are varied or waived under a transaction not at arm’s length, and in particular under a transaction entered into gratuitously, the amount to be taken into account for capital gains tax is the amount which would have had to be paid for the variation or waiver if the transaction had been at arm’s length. This requires the insertion of a notional consideration equal to the market value which would properly apply, instead of the actual amount paid (if any).
par 4(7)Subparagraph (4) applies for corporation tax as it applies for capital gains tax.
Sub-leases out of short leases
Paragraph 5 sets out the rules for determining the proportion of the original cost of a short lease which is to be set against a premium received on the grant of a sub-lease out of that lease. When a sub-lease is granted out of a short lease the normal part disposal rules (section 557) do not apply. Instead, that part of the original expenditure which, under the Table in paragraph 2, will waste away over the period of the sub-lease is to be deducted from the amount received for the sub-lease. Where the rent payable under the sub-lease is larger than the rent payable under the head lease so that the premium received for the sublease is smaller than it would otherwise have been, the amount to be allowed is the appropriate fraction of the cost of the head lease, being the proportion the actual premium bears to the full premium which would properly be payable.
par 5(1) This paragraph applies in relation to short leases (a lease whose currency is 50 years or less).
par 5(2) In computing the gain on the part disposal of a short lease (that is, either on the grant of a sub-lease out of the short lease for a period less than the remaining duration of the head lease or on the grant of a sub-lease out of a part only of the property included in the head lease), the allowable expenditure is to be computed as provided in this paragraph and the general rule for part disposals (in section 557) is not to apply.
par 5(3) The part of the cost of the head lease which is to be set against the premium received on the grant of the sub-lease is to be that amount which will waste away over the duration of the sub-lease as calculated from the Table in paragraph 2. This rule applies in the case where the premium is equal to or greater than the amount which would be obtainable if the rent under the sub-lease were the same as the rent under the head lease (referred to as the “”). Where, however, the premium on the sub-lease is less than the full premium, for example, where a profit rent is taken so that the premium is lower than it would otherwise be, the part of the cost of the head lease is to be reduced to that proportion which the actual premium bears to the full premium.
Sub-lease out of short lease (at same rent)
In June 1990 a person takes a lease of property for a premium of €20,000 to run until 23 June, 2050. On 23 June, 2002 he gives a sub-lease for 20 years at the same rent as he pays under the main lease for a premium of €15,000. The grant of the sub-lease is a part disposal of the person’s interest in the property which at that time has become a short lease. The chargeable gain (disregarding indexation relief under section 556) is to be computed as follows —
Consideration given for the lease
Percentage applicable to lease
of 48 years (from 2002 to 2050)
Percentage applicable to lease
of 28 years (from 2022 to 2050)
Percentage applicable to period
of sub-lease (20 years)
Percentage applicable to original lease is 100.
Amount allowable is
The receipt of the premium of €15,000 will have given rise to an income tax charge on 19/50ths of the premium, that is, €5,700.
The amount chargeable to capital gains tax will, therefore, be adjusted in accordance with paragraph 6 as follows —
Amount computed as above
Less: Charged to income tax
Amount chargeable to capital gains tax
Sub-lease out of short lease (at higher rent)
If the facts were the same as in the example given but a higher rent was taken with a lower premium of, say, €10,000, the amount allowable would be reduced as follows by applying the fraction.
Premium receivable with the same rent
× 2,480 = 1,893
The gain (disregarding indexation relief) would then be —
Proportion of cost of original lease
Charged to income tax
19/50 × €10,000
Amount chargeable to capital gains tax
par 5(4) Where only part of the land comprised in the head lease is covered in the sub-lease, the part of the cost of the lease attributable to the premium on the sub-lease is to be determined by reference to the market value (at the time the sub-lease is given) of the part of the land comprised in the sub-lease and the whole of the land respectively. The balance of the cost is attributable to the interest in the undisposed part of the land.
Where only part of the land is covered in the sub-lease, the allowable cost is apportioned by reference to the fraction —
market value of the part in the sub-lease
market value of the whole
If this is equal to 1/3rd, this fraction is to be applied to the allowable cost. In the example given under subparagraph (3) the allowable cost was €2,840 and 1/3rd is €947 and the gain then would be —
Less amount charged to income tax
Chargeable to capital gains tax
Exclusion of premiums taxed under Case V of Schedule D
Paragraph 6 provides for a deduction, in the computation of the amount of chargeable gains, for the part of premiums (and amounts treated as premiums) which is deemed to be rent and is charged to income tax as such under sections 98 and 100. Thus, the paragraph ensures that sums which have been brought into charge to income tax are not charged again to capital gains tax.
par 6(1) Where the interest out of which a lease is granted is not itself a short lease (that is, it is a freehold or a long lease), the computation of the chargeable gain is made under the normal rule for a part disposal. However, the amount chargeable to income tax under section 98 is to be excluded from the consideration for the part disposal and, in order to achieve the correct mathematical result, is also to be excluded from the numerator of the fraction used for apportioning allowable expenditure in computing a chargeable gain on a part disposal (but not from the denominator).
par 6(2) Where a short lease is granted out of a short lease, the capital gains tax computation is to be made in the first instance under the rules relating to short leases on the basis of the full amount of the premium received and then from the gain so computed the amount charged to income tax under section 98 is to be deducted. The resultant amount is the amount of chargeable gains to be assessed. The maximum deduction will be the amount of the gain, so that the deduction cannot convert a gain into a loss or increase a loss.
par 6(3)(a) Provision is made to exclude from the charge to capital gains tax any sum charged to income tax under Case V of Schedule D by virtue of the special rule in section 100 for dealing with a sale of land subject to a right of reconveyance. The amount charged to income tax is to be excluded from the consideration for the part disposal and, in order to achieve the correct mathematical result, is also to be excluded from the numerator of the fraction used for apportioning allowable expenditure in computing a chargeable gain on a part disposal (but not from the denominator).
par 6(3)(b) In the case where the interest disposed of is a short lease subparagraph (3)(a) does not apply. Instead, the amount charged to income tax under section 100 is to be deducted from the gain as computed under subparagraph (2); but the maximum deduction will be the amount of the gain, so that the deduction cannot convert a gain into a loss or increase a loss.
par 6(4) References to a premium in subparagraphs (1) and (2) include any amount deemed to be a premium under subsection (3) or (4) of section 98, being an amount in lieu of rent as consideration for the surrender of a lease or for the variation or waiver of the terms of a lease.
par 6(5) The general rule (section 551) excluding sums chargeable to income tax from the consideration for a disposal of an asset does not prevent any amount being taken into account in a capital gains tax computation because it has been taken into account in a charge under Case V Schedule D. This provision is necessary to enable such an amount to be brought into the capital gains computation in the first instance before the part chargeable to income tax is excluded to give the final amount chargeable to capital gains tax.
(illustrating paragraph 6(1) – lease out of freehold or a long lease)
Suppose that a freehold property is acquired on 6 May, 1998 for €100,000. On 6 May, 2002 a lease for 21 years is granted at a premium of €25,000, and a rent of €8,000 per annum. The interest remaining undisposed of (the reversion) is valued at the time the lease is granted at €105,000.
The income tax liability on the premium is —
Fraction under section 98(1),
Chargeable to income tax
The capital gains liability (disregarding indexation relief under section 556) is —
Chargeable to income tax
proportion of allowable expenditure, that is —
€10,000 (premium less income charge
€25,000 (premium) + 105,000 (reversion)
(illustrating paragraph 6(2) – lease out of short lease and no gain or loss after adjustment for income tax charge)
Suppose that a lease having 21 years to run is acquired on 6 May, 1996 for €100,000. On 6 May, 2002, when the lease has 15 years to run, a 7 year lease is granted for a premium of €60,000 without any change of rent.
Calculate capital gains liability first —
Percentage from table
Head lease (21 years)
Sub-lease (15 years left)
Sub-lease ending (8 years left)
Cost attributable to sub-lease —
Chargeable gain (subject to adjustment) is —
Allowable cost (disregarding indexation relief under section 556)
The amount chargeable to income tax is —
Less: Fraction (section 98(1))
Chargeable to income tax
The income tax charge stands but as it exceeds the chargeable gain there is no capital gains tax liability, and there is no allowable loss.
(illustrating paragraph 6(2) – lease out of short lease and gain after adjustment for income tax charge)
Suppose that in Example 2 the head lease had 49 years to run when it cost €100,000 and that one year later a sublease for 21 years is granted at a premium of €80,000.
Capital gains liability is as follows —
Percentages from table —
Head lease (49 years)
Sub-lease (48 years left)
Sub-lease ending (27 years left)
Cost attributable to sub-lease is —
Chargeable gain (subject to adjustment) is —
Allowable cost (disregarding indexation relief under section 556)
Chargeable to income tax
The adjusted chargeable gain is —
Less: income tax charge
net chargeable gain
Disallowance of premium treated as rent under superior lease
Paragraph 7 provides for an adjustment in the capital gains tax computation where a person who grants a sub-lease out of a lease which was acquired for a premium is given an allowance for income tax purposes under section 103(2) in respect of part of that premium. The allowance given for income tax purposes in the rents computation is to be set against the amount of any capital loss which the person concerned is treated as having made on the grant of the sub-lease and the loss is to be reduced by that allowance. The application of this rule cannot convert the loss into a gain or increase any gain.
The paragraph also sets out the effect on capital gains tax computations where, for income tax purposes, sums are treated as premiums or additional premiums under section 99 (charge on assignment of lease granted at undervalue) and section 100 (charge on sale of land with right to reconveyance).
par 7(1) Provision is made for an adjustment of a capital loss where an allowance under section 103(2) is given for income tax purposes. That section provides that where a person who holds property under a superior short lease and who grants a sub-lease is liable to income tax on the rent received and on the appropriate proportion of the premium received, he is entitled to a deduction of a part of the premium which he paid to the superior landlord when he acquired his lease. That part of the premium is calculated by reference to the part of the premium already assessed on the superior landlord under section 98(1) and the amount so assessed is treated under section 103(2) as a rent payable (accruing from day to day) by the person granting the sub-lease spread over the period for which he holds the property under his superior lease. A proportion of the rent so deemed to be payable is then calculated by reference to the period of the sub-lease and the amount apportioned to the sub-lease is the deduction to which the sub-lessor is entitled in adjusting the income tax assessment on him. This subparagraph provides for a corresponding adjustment in the computation of a capital loss and the adjustment is made by reducing the loss incurred on the grant of the sub-lease. The adjustment is not, however, to convert a loss into a gain or to increase any gain.
On 26 April, 1995 A grants B a lease for 21 years at a premium of €12,600 and a rent. On 26 April, 2002 (7 years later) B grants a sub-lease to C for 7 years at a premium of €2,000 without any change of rent.
(i) B’s capital gain (subject to adjustment) is —
Percentages from Table in paragraph 2 —
Head lease (21 years)
Sub-lease granted (14 years left)
Sub-lease ends (7 years left)
Part of consideration attributable to sub-lease
(ii) The charge to income tax on A is —
Premium received from B
Charge to income tax
(iii) The charge to income tax on B (subject to adjustment) is —
Premium received from C
Charge to income tax
But, as against €1,760, B is entitled to a deduction under section 103(2) as follows —
Charged to A as rent
21 year lease – annual deduction
Total deduction for period of sub-lease
(7 years @ €360 p.a.)
B’s final income tax position is therefore —
Amount originally chargeable
Less section 103(2) deduction
Loss for income tax
(iv) B’s final figure for capital gains tax is therefore —
Loss at (i) above
Disallow section 103(2) deduction
But as this would convert the loss into a gain the final clause of subparagraph (1) comes into operation to give neither a chargeable gain nor an allowable loss. The result is that for capital gains tax purposes the transaction is treated as no gain and no loss but B gets full relief for the section 103(2) deduction of €2,520 by setting the income tax loss of €760 against other rents or by carry forward.
par 7(2) Under section 99, where a lease is assigned at undervalue by a transaction not at arm’s length, the market value is substituted for the consideration received in computing the amount chargeable to income tax as rent. This subparagraph ensures that section 551, which provides for the exclusion from consideration in a capital gains tax computation of sums chargeable to income tax, is not to be taken as excluding from a capital gains computation the substituted amount under section 99.
par 7(3) Under section 100, where an interest in land is sold on terms providing for it to be sold back (or leased back) to the vendor or a person connected with the vendor, an income tax charge is imposed on the vendor by treating as a premium the difference between the sale price and the price fixed for the resale back to the vendor. As the price on the resale may vary with the date, the section provides that the price to be taken is the lowest possible under the terms of the sale and that the vendor may, within 6 years after the reconveyance, be given an adjustment of the income tax assessment by reference to the facts as they eventually emerge. Where such adjustment is made, all necessary adjustments to the capital gains tax computation are to be made whether under this paragraph or paragraph 6.
Expenditure by lessee under terms of lease
par 8 Where a lessee of premises is obliged under the terms of a lease to carry out work on the premises, the amount by which the lessor’s interest at the time when the lease was granted would have been increased, if the work had been done at that time, is treated under section 98(2) as a premium payable under the lease. Consequently, an appropriate part of that amount is charged to income tax on the lessor under Case V of Schedule D. Paragraph 8 provides that the amount so charged to income tax is to be treated for capital gains tax purposes as allowable expenditure under section 552(1)(b) incurred at the time the lease was granted.
Duration of leases
Paragraph 9 provides rules for determining the duration of a lease in cases where the lease incorporates special clauses. It also provides, as a general principle, that the duration of a lease is to be determined by a reference to the facts known or ascertainable when the leaseholder acquired the lease, whether by grant or assignment.
par 9(1) The following rules are to apply in ascertaining the duration of a lease for capital gains tax purposes.
par 9(2) Where a lease includes provision for the lessor to terminate the lease by notice, the lease is not to be treated as granted for a term extending beyond the earliest date on which it could be terminated by the notice. Thus, if a lease is granted for 30 years but with a provision that the landlord can terminate it by notice after 15 years, the lease is treated for capital gains tax as a 15 year lease.
par 9(3) Where any of the terms of the lease (including one relating to forfeiture) or any other circumstances make it unlikely that the lease will last beyond a date falling before the expiry of the lease, the lease is not to be treated as having been given for a period ending after that date. In particular, where there is provision in the lease for an increase in rent after a given date or for the lessee’s obligations to become more onerous, but with a right for the lessee to terminate the lease, and the lessee is likely to use the right, the lease will be deemed to have been given for a period ending on the date on which the lessee does so. These provisions and those in the following subparagraph are designed to prevent the real terms of a lease being artificially prolonged for capital gains tax purposes.
par 9(4) Where the lease gives the lessee an option to extend its term, the duration of the lease is to be treated as extended for as long as it could be extended by the lessee but this provision is subject to any right of the lessor to determine the lease.
par 9(5) As a general principle the duration of a lease is to be decided by reference to the facts, known or ascertainable, at the time when the lease was acquired or created.
Leases of property other than land
Paragraph 10 extends certain of the provisions relating to leases of land to leases of property of any description (for example, leases of plant and machinery). It also provides the rule for determining the term of a lease of movable property which is a wasting asset.
par 10(1) The rules relating to leases of land in respect of part disposals, payments treated as premiums, sub-leases out of short leases and the duration of leases are to apply to leases of property other than land.
par 10(2) A lease of a wasting asset which is movable property is assumed to terminate not later than the end of the life of the wasting asset. This provision is directed against avoidance of capital gains tax by the grant of a lease in excess of the predictable life of the wasting asset.
Relevant Date: Finance Act 2016
Where a landlord and tenant bring a lease to an end, they usually do so by completing a deed of surrender.
However, sometimes, it may be implied that a surrender has occurred. The term commonly used for an implied surrender is a surrender “by operation of law”.
In a recent case, QFS Scaffolding v Sable1 , the court considered some of the relevant principles for a surrender by operation of law to take place.
The landlord (Mr and Mrs Sable) granted a lease to a tenant company which eventually entered into administration. Prior to the administration, a new company (QFS) was formed with a view to taking over the tenant’s business.
The Sables negotiated terms for a new lease with QFS who, in fact, went into occupation. However, the negotiations faltered and no new lease was entered into. Instead, QFS asked the administrator of the tenant to assign the lease to it and, as a result of this request, a deed of assignment was executed.
Mr and Mrs Sable claimed possession against QFS. They claimed that a tenancy at will had been granted to QFS during the negotiations for the new lease and this had been with the consent of the tenant. Further, Mr and Mrs Sable claimed to have terminated that tenancy at will, as a result of which they were now entitled to possession. The court initially found in favour of Mr and Mrs Sable and granted an order for possession. QFS challenged that finding in the Court of Appeal.
The appeal court found that, if the lease had been surrendered, the conduct of Mr and Mrs Sable and QFS would have justified the indication of the grant of a tenancy at will (or perhaps, a licence) during the negotiations. Importantly though, the appeal court was not prepared to accept that there had been a surrender of the lease. It was therefore not appropriate to imply the existence of a tenancy at will or licence from Mr and Mrs Sable to QFS. On the basis that the lease had not been surrendered or otherwise determined, the tenant (in administration) was still entitled to possession.
There needed to be unequivocal conduct on behalf of the tenant which would justify the conclusion that the lease had been impliedly surrendered. Here, the tenant had simply stood by while negotiations progressed between the Sables and QFS. On the basis that the lease had not been surrendered, it could not be implied that a tenancy at will between the Sables and QFS had arisen. The tenant had therefore not assented to the granting of a tenancy at will and the lease was now vested in QFS as a result of the deed of assignment.
The general principles relating to surrenders by operation of law can be summarised as follows:-
- No distinction between surrender by operation of law and implied surrender;
- The landlord or tenant has been party to some act, the validity of which he is afterwards estopped from disputing, and which would not be valid if the tenancy continued to exist;
- The subjective intentions of the parties are not relevant;
- There is no estoppel by mere verbal agreement; in addition there must be some act inconsistent with the continuance of the tenancy;
- A surrender is treated as having taken place immediately before the act to which the landlord or tenant is a party;
- The conduct of the parties must unequivocally amount to an acceptance that the tenancy has ended, i.e. either relinquishment of possession and its acceptance by the landlord; or other conduct consistent only with the cesser of the tenancy;
- It must be inequitable for either landlord or tenant to dispute that the tenancy has ended;
- An agreement by either landlord or tenant that the tenancy shall be put an end to, acted upon by the tenant quitting the premises and the landlord taking possession, amounts to a surrender by operation of law; the giving and taking of possession must be unequivocal;
- Where a tenant requests a landlord to let property to a third party, and the landlord does so, the lease is surrendered at the time of the new letting; the surrender does not take place before the time of the new letting; it is essential that the new letting is effected with the consent of the original tenant; if the original tenant does not consent or know of the new tenancy, there is no surrender; but the original tenant’s consent may be inferred from conduct or from long acquiescence in the new arrangements;
- A surrender by operation of law may take place where the landlord, with the original tenant’s consent, accepts the new tenant as his direct tenant; the consent of the landlord and the original tenant is needed.