Lease Possibilities

There are special rules for capital gains tax rules on leases. The rules reflect the range of transactions that may be effected by a lease.

It is possible to have a term ranging from a very short period to something approximating to an outright sale. The rent may range from a nominal rent to a full market value rent and any corresponding premium (sale price) will range inversely may from a nil price to a full market price.

A very long lease at a nominal rent approximates to a full disposal of the lessor’s interest and the sum received is capital. It is effectively treated as a sale. In contrast, a shorter lease at a market rent without a premium does not involve a disposal at all and the sums received are income.

A Lease once created, may be assigned or transferred. Depending on the inherent value of the lease to the lessee, it may be transferred for a price or payable by the assignee to the assignor or if there is a negative value by the assignee to the assignor.

In practice, most leases are either at market value with zero premium or for full market premium (price) with a nominal rent. Premiums are more common on the assignment of a lease than on the grant of the lease.

Grant of Lease

Sums granted for so called short leases are deemed to some extent to be rent, and to some extent, to be premium. This is to prevent the transformation of a rental or income receipt into a premium or capital gains receipt.

A reverse premium paid by a landlord to a tenant to accept a lease or an assignor to an assignee to accept the lease which has a negative value is subject to income tax or corporation tax.

The grant of a lease is a part disposal for the purpose of capital gains tax. The rent receivable is subject to income tax. See our chapter on rental income. The premium received may be partly subject to income tax and capital gains tax.

Long v Short Leases

There is a distinction drawn between a long lease to be one for more than 50 years and a short lease to be one for less than 50 years. The premium or price for the grant of a long lease is wholly subject to capital gains tax.In the case of a lease less than 50 years the premium is partly subject to income tax as rental income and the rest is subject to capital gains tax.

There is a table which sets out the factors which apply to the apportionment. They vary with the length of the lease. In the case of a very shot lease most is deemed subject to income-tax whereas in the case of a lease approaching 50 years only a small amount is deemed income.

Assignment of Lease

A sale of a lease by an original tenant is itself subject to capital gains tax. Broadly similar provisions apply to the assignment of a lease i.e. where the original tenant or subsequent hand transfers the leasehold interest to another tenant. A portion of the assignment price is treated as income tax and a portion is treated as subject capital gains tax.

In the case of a long lease e.g. 99 years this is simply equivalent to the sale price. In the case of shorter leases, less than 50 years provisions equivalent to the above apply. The acquisition cost if any on the grant of the lease is treated as a wasting asset. The amount which may be deducted progressively reduces over the term of the lease.

The sale price or premium received on the transfer of the lease may be apportioned partly as income and partly as capital gains.


The  grant of a lease and the assignment of a lease is subject to capital gains tax as disposals. Where a premium i.e. a price is received which would arise only in the case of a valuable or long-term interest (e.g. long lease) it is treated in the same way as a sale for consideration.

Premium includes a lump sum but also sums payable in place of rent consideration or price for the surrender of the lease (reverse premium) reimbursement of expenses incurred by tenant in relation to the property, amounts payable for change in the terms of the lease. The may be deemed premium when the lease is not at arm’s length.

There is a sliding scale treats all of the premium as subject to capital gains tax and known as rental income) with a lease over 50 years and all as rental income in the case of a lease for less than one year. There is a chart setting out the relative proportions treated as rent and premium where the term is between 50 and one year.

Deemed Premium

In certain circumstances there is deemed to be a premium.

Where a lease is granted at an undervalue there is a deemed premium or price in respect of the undervalue. This is simply the general rule that assets transferred at less than market value or for zero consideration are deemed transferred at market value.

Where a tenant pays a sum to a landlord in place of rent or for the surrender of a lease this is deemed a premium. Similarly a sum paid for the variation of a least term e.g. rent or obligation is similarly deemed a premium. If no sum is paid for the variation and the variation has a value then its market value will be deemed to have been paid.

Where a tenant is obliged to carry out capital works to the premises there is deemed premium to the extent that the value of the landlord’s interest in the premises have increased

Lease is Part Disposal

The grant of a long lease is a part disposal. The part disposed of is calculated by reference to the proportion that the value of the lease bears to the value of the interest retained. Where a short lease i.e. one less than 50 years is granted which is itself an apportionment is made of the capital and income element by reference to the table.

There is deemed to be a part disposal of the landlords interest or right in the land. Part of the premium is subject to income tax and part is subject to capital gains tax.

In accordance with the rules on a part disposal of an interest proportionate part of the cost is deductible very long leases granted. The cost is the proportion that the proceeds/premium represent as a proportion of the proceeds and the value of the remaining part.


A short lease is deemed a wasting asset. This means that expenditure attributable to it is written off over its life so that there is less of a deduction available.

In the case of leases less than 50 years both the original acquisition cost of the lease and enhancement expenditure is progressively written off. Therefore upon later assignment part only based on a published statutory scale is allowable.

In the case of the sale of a lease of 50 years only the capital part of the original premium is allowed as a deduction. The part that would be deemed a rental income prior to the head landlord is disallowed. This capital part is itself wasted or apportioned to depend on the time that has expired since acquisition.

The amount allowable as expenditure is written off in accordance with the formula depending on the period is involved. Therefore where lease has for example 20 years to run and is purchased for a price/premium and later sold when there is 10 years left to run part of the purchase price reflecting the fact that have to lease as run reduces the amount of the premium that maybe deducted. The basis is set out in the table and is not a straight line basis.


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