Grant of short lease from a short lease – special rules exist to calculate the gain when a short sub-lease is granted out of a short head-lease. When a short lease is granted, part of the premium received by the grantor will be charged to income tax as property income as below:
Premium less 2% x P x (10-1) is the taxable property income
The grant of a short lease is treated as a part disposal for CGT purposes. However, as the lease is less than 50 years when calculating the gain, we must restrict the allowable cost by using the depreciation table in schedule 8. We restrict allowable cost for CGT purposes by using a new formula as below:
Cost x (s-x) / y, where
S is the % for years of head-lease remaining at grant of a sub-lease
X is the % years of head-lease remaining when the sub-lease expires
Y is the % years of head-lease remaining at date of acquisition
Then you need to deduct the amount charged as property income from the gain. If this is below 0, the chargeable gain will be treated as nil, no capital loss is created and there is no possibility of any income tax or CGT being repaid.