188体育

Leases merger

TCGA92/S43

Where a leaseholder of land acquires a superior interest (either the freehold reversion or the immediately superior leasehold interest) in the same land, the earlier lease will be extinguished. The two separate assets, that is the original lease and the superior interest, are regarded as merged within TCGA92/S43 and the owner now has a single asset.

Allowable expenditure

On any disposal of this single asset, the allowable expenditure will be the sum of the consideration given for:

• the acquisition of the earlier lease, but see below, and
• the acquisition of the superior interest (the freehold reversion or the superior leasehold interest).

If the earlier lease had less than 50 years to run at the date on which the superior interest was acquired the expenditure on the acquisition of that lease must be 鈥榳asted鈥�, see CG71141, down to the date of acquisition of the superior interest.

If the superior interest is itself a lease with less than 50 years to run at the date of its disposal, the allowable expenditure calculated in accordance with the above rule will also need to be 鈥榳asted鈥�.

Valuations

Valuations at 6 April 1965 (for the purposes of TCGA92/Sch 2) or 31 March 1982 (for indexation or rebasing purposes) may be required in cases involving the merger of leases.

Where this is the case, there is a deemed disposal and reacquisition of the asset at the valuation date. The asset to be valued is the asset which existed on that date. So, if the superior interest was acquired after the valuation date, the asset to be valued is the earlier lease. In these circumstances the allowable expenditure will be:

• the market value of the leasehold interest on the valuation date, 鈥榳asted鈥� to the date of acquisition of the superior interest (if appropriate), plus
• the cost of the superior interest.

Interaction with time-apportionment

TCGA92/Sch 2/Para 16 (9)

If the original lease was acquired before 6 April 1965 and the time-apportionment rules apply, see CG15500P, in applying the time-apportionment formula to the gain the whole of the expenditure attributable to the freehold is deemed to have been incurred on the date of the earlier acquisition of the leasehold.

ESC/D42

Under ESC/D42 (published on 29 June 1992) for disposals on or after 29 June 1992, indexation allowance on the cost of acquiring the original lease is calculated by reference to the date of its acquisition.

Indexation allowance on the cost of acquiring the superior interest is calculated by reference to the date of its acquisition.

Any indexation allowance relating to improvements is calculated by reference to the date on which the expenditure was incurred, TCGA92/S54 (4)(b).

Example 1

J Ltd acquired a long lease in January 1985 for 拢30,000. In January 1988 they acquired the freehold reversion for 拢20,000 and the long lease was extinguished. In January 2017 they sold the freehold for 拢500,000.

The gain arising is calculated as follows:

Unindexed gain

Disposal proceeds	拢500,000
Less Cost of lease	拢30,000
Less Cost of freehold	拢20,000
听	拢450,000

Indexation on lease

Cost of lease x Indexation factor

= 拢30,000 x 1.911

= 拢57,330

Indexation on freehold

Cost of freehold x Indexation factor

= 拢20,000 x 1.570

= 拢31,400

Indexed gain

Unindexed gain	拢450,000
Less Indexation on lease	拢57,330
Less Indexation on freehold	拢31,400
听	拢361,270

Example 2

Mr M acquired a lease with fifty years to run on 31 March 1975 for 拢10,000. The market value on 31 March 1982 was 拢50,000. On 31 March 1987 he acquired the freehold for 拢60,000. On 1 January 2017 he sold the freehold for 拢800,000.

The gain arising is calculated as follows:

Amount to be deducted from cost of lease

Value of lease at 31 March 1982: 拢50,000

At the date that the freehold was acquired, the lease had 38 years to run, so the cost of the lease must be 鈥榳asted鈥�, see CG71141. The 鈥榩eriod of ownership鈥� begins on 31 March 1982.

[(P(1) - P(3) / P(1)] x expenditure otherwise allowable under S38(1)(a)

P (1) is the percentage derived from the table in TCGA92/Sch 8/Para 1 (6) for the duration of the lease at the beginning of the period of ownership;

P (3) is the percentage derived from the table in TCGA92/Sch 8/Para 1 (6) for the duration of the lease at the date of disposal.

= [(96.593 - 94.189) / 96.593] x 拢50,000

= 拢1,244

Allowable cost of lease

Value of lease	拢50,000
Less Amount to be deducted from cost of lease	拢1,244
听	拢48,756

Allowable expenditure

Allowable cost of lease	拢48,756
Plus Cost of freehold	拢60,000
听	拢108,756

Chargeable gain

Disposal proceeds	拢800,000
Less Allowable expenditure	108,756
听	拢691,244