if some one paid £15000 for a 15 years lease, what happen he decides to cease trading after 3 years where the break clause of the lease permits,
15000 less 15000(15-1)x2% = 10800
less
claimed 10800/15 x2 = 1440
can he claim the remaining of the £9360 in the cessation year?
many thanks
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Replies (3)
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What's the effective duration of the lease?
There may be two possible answers depending on the answer to this question.
1. If it is a 15 year lease - then you've already claimed 2/15 (or should it be 3/15) of that part treated as a revenue expense. This is the harder question.
2. But the fact that there is a break clause could point to the fact the term of the lease is treated as 3 years. In which you've claimed too little - you'd have been able to deduct the whole lot.
But it depends on what the break clause says and how likely it was to be exercised at the time the lease was entered into. Does it say "exercisable at year 3" or "exercisable if ceases to trade?"
Claim the balance as part of CGT base cost of lease
This is my view - assuming that this is a full 15 year lease. I am looking at the corporation tax legislation at CTA 2009 for a trader. The income tax rules are similar but I haven't got them to hand.
1. The key section permitting the tenant to deduct is in CTA 2009 s 63. The tenant is allowed to deduct a certain amount "for each qualifying day" - s 63(1). This amount is treated as a revenue expense.
2. The daily amount he is allowed to deduct is fixed at the outset by the formula in s 63(4). Which says take the revenue amount of the premium and divide by the effective duration of the lease.
3. But the deduction lasts only "for each qualifying day" - this is any day of the term of the lease on which the tenant actually occupies the property (wholly or partly) for the purpose of carrying out the trade. - s 63(3).
4. So if the tenant moves out at year 3, well he can't claim a revenue expense any longer - see point 2 above. There is a balance remaining and this balance is NOT treated as a revenue expense.
Does this mean the balance can't be deducted? Not necessarily. Look at the CGT treatment.
1. By exercising the break clause, the tenant has disposed of the lease.
2. He is allowed to deduct his CGT base cost - TCGA 1992 s 38.
3. The base cost is the premium paid - but he has to exclude any part of the premium for which he has already received income tax relief - TCGA 1992 s 39.
4. So you don't include the £1440 you already claimed for. But you do include the £9,360 balance.
5. This is subject to the rules on wasting assets where you have to write down the base cost.
You may find this article helpful
http://taxnotes.co.uk/property-tax-and-the-lease-premium-rules-tenant-ex...