Can roll over relief be claimed on lease?

Can roll over relief be claimed on lease?

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A trader has been trading for 10 years now and is selling the lease on his shop.He will realise a gain of £50,000.He wants to buy a free hold shop of a new trade for £100,000.Can he roll over the gain or is there a problem as the "Old asset" is depreciationg asset and the "new asset" is not?
Harry Mitchous

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By Paul Soper
14th Jun 2005 16:09

No problems
Assuming that the gain on disposal is chargeable as a capital gain there is no problem - both assets are qualifying assets. If the replacement was the lease the gain could be suspended for up to 10 years which is the rule you are thinking of.

The only drawback here is that if the lease is less than 50 years in length part of the proceeds will be taxable as income under the old Schedule A rules and that cannot qualify for roll-over.

A 21 year lease is 40% capital and 60% income - the capital element growing by 2% for every year of the lease minus one.

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By markfaherty
15th Jun 2005 09:58

Not so clear cut
The assignment of an existing lease from one tenant to another is generally the disposal of the whole of the assignors interest in the property and is normally only subject to a capital gains tax charge - this is always the case where the original grant of the lease from the landlord was more than 50 years.

There is the possibility, however, for an income tax charge under schedule A to arise on the assignor. This occurs where the premium obtained by the original grantor of a short lease (50 years or less) was less than could have been obtained. Successive assignors of the lease may be liable to an income tax charge on the part of the proceeds and this will prevail until the whole of the premium originally forgone has been charged on subsequent assignments.

The amount chargeable to income tax is the excess of the premium received over the premium paid less 2% for each year of the original lease minus 1.

The amounts charged under these provisions are not excluded from the capital gains tax computation - Schedule 8.6(2) TCGA 1992.

Example:

A grants a 21 year lease to B for a premium of £10,000 but the terms of the lease indicate that £40,000 should have been demanded. The premium forgone is £30,000 and A is charged to income tax under schedule A on this less 2% x 20 years (40%) i.e. £30,000 - £12,000 = £18,000. B then assigns the lease to C for £20,000 resulting in an excess premium of £10,000 less 40%, as above, giving an amount chargeable under schedule A of £6,000. The balance forgone to carry forward to the next assignment is £30,000 less £10,000 = £20,000. Therefore if C assigns to D for £50,000 the excess premium charged to schedule A is restricted to the £20,000 carried forward less 40%.

The capital gains in each case, except for the grantor, A, are calculated ignoring the schedule A charges but the whole of the gain may be rolled over on the acquisition of qualifying business assets providing the whole of the PROCEEDS are reinvested - partial relief given where this does not apply. The gain on the assignment of a short lease is calculated using the wasting asset rules and the cost has to be depreciated accordingly - see the table at Schedule 8.1 TCGA 1992.

Hope this clarifies matters.

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