This site uses cookies. By continuing to browse the site you are agreeing to our use of cookies. To find out more about cookies on this website and how to delete cookies, see our Cookie Policy.
Analytics

Tools which collect anonymous data to enable us to see how visitors use our site and how it performs. We use this to improve our products, services and user experience.

Essential

Tools that enable essential services and functionality, including identity verification, service continuity and site security.

Where Taxpayers and Advisers Meet

Grant of short lease out of freehold & entr relief

simpsonite
Posts: 96
Joined: Wed Jun 24, 2009 11:58 am

Grant of short lease out of freehold & entr relief

Postby simpsonite » Tue Mar 24, 2015 12:51 pm

Hi all,
My client owns a freehold property which is held in his own name. The free hold is used for the commercial activities of his company.
He has decided to grant a 15 year lease for a premium of £215,000 with an annual rent of £25,000

He bought the freehold in 1980 for around £50k. So, for the time being I have assumed a march 82 rebase value of £52k.
He has however spent an additional £215k in capital improvements.
As the leasehold is a grant then this is treated as a part disposal for CGT purposes and because it is a short lease then an element of the premium will be charged to income tax as schedule A.

For the sake of waffle I have worked out the element chargeable to income tax & the element deemed as a capital disposal for my CGT comp.
My query is with regard to the base cost adjustment calculation to find the adjusted part disposed base cost.

the formula is - base cost x disposal/disposal + reversionary int + right to receive the rent .

In my example the base cost I have used for the fraction adjustment is 52k 31/03/82 + 215k of capital improvements.
So am I correct to apply £267k x fraction adjustment(as above) in order to find my adjusted base cost figure for my part disposal cgt comp?
Logic surely suggests that the capital improvement element would also be plumbed into this calculation in addition to the initial freehold purchase?


Also, I am happy that if my client had sold the free hold instead then this would attract entr relief as it is used by his company.
So with regard to this part disposal comp I assume entr relief would equally apply?
Or could it be denied as the whole asset is not being disposed of?

thoughts much appreciated
simpsonite

Top

--------------------------------------------------------------------------------


Post Reply

LozaACCS
Posts: 1504
Joined: Wed Aug 06, 2008 3:55 pm

Re: Grant of short lease out of freehold & entr relief

Postby LozaACCS » Sat Mar 28, 2015 9:26 pm

Whether your client grants a lease or sells it, I cannot see how there could be a material disposal since he appears to be disposing of an interest in an asset rather than disposing of a business, so no I do not believe ER would be due.

You have not quoted a value of the reversion, lets say it would be 300K, the calculation is;

Grant of lease
premium 215K

cost 267K (as you suggest)

The CGT element is 215K * 2% * 14 = 60.2K

The gain is

Premium 215K
Cost 267 * 60.2/215 + 300 = 31K
215K - 31K = 184K
184K less the property income (155K) = 29K

simpsonite
Posts: 96
Joined: Wed Jun 24, 2009 11:58 am

Re: Grant of short lease out of freehold & entr relief

Postby simpsonite » Tue Mar 31, 2015 11:42 am

Hi Loza,
Thanks for your response.
So it appears you are in agreement that the capital improvement element is also plumbed into the calculation in addition to the initial free hold purchase cost, In order to find the adjusted part disposal base cost.

I am still waiting on the reversionary figures from the Surveyors.
I agree your base cost adjustment figure of £31k based on a 300k reversion.

However you are incorrect to deduct the property income figure of £155 in your comp. :?
This element of the premium is charged to schedule A income tax because it is the grant of a short lease out of a freehold.

With regard to entr relief.
Although it is not an outright disposal my thinking is that entr relief would apply because the part disposal would represent a 'substantial change in my clients business activity'.
- he is granting a 15 year lease out of his free hold and as such my clients company will now be would up.
Bear in mind the freehold property is an asset used in the trade of my client's company so entr relief would apply on the freehold disposal.

thanks
simpsonite

simpsonite
Posts: 96
Joined: Wed Jun 24, 2009 11:58 am

Re: Grant of short lease out of freehold & entr relief

Postby simpsonite » Tue Mar 31, 2015 12:18 pm

Hi loza,
sorry, my error. :oops: :oops:
Yes I agree your gain of 29k.

simpsonite


Return to “Capital Gains Tax, CGT”