Flashcards in Chapter 7 Grants of Leases Deck (2)
Granting a lease and granting a long lease
The grant of a lease is the creation of a new asset. If an individual who owns the freehold grants a lease to a tenant, the freeholder has created a new asset and will regain the property rights when the new lease comes to an end. In return for occupation the tenant will pay the freeholder a sum of cash (premium). The premium is a capital sum and will be charged to CGT in the hands of the freeholder. The gain is calculated by treating the grant of a lease as part disposal of the freehold.
Granting a long lease – this is a lease for over 50 years, the gain is calculated by:
Allowable cost = A/ (A+B) x acquisition cost
(A is the gross amount of the premium paid and B is the value of the remainder (the reversion or the reversionary interest)).
The reversion consists of two things. The first is the capital value of the property when it reverts back to the freeholder (when lease expires). The second is the right to receive future rents under the lease.