How does CGT apply to a lease?
Answered 17 March 2026
CGT and Leases
What the law says
The key legislative framework is found in TCGA 1992 and Schedule 8 to that Act. The general principle is that the grant of a lease is treated as a part disposal of the landlord's interest in the land, since the lessor retains part of their original interest.
HMRC Guidance / Practice
1. Grant of a Lease — Part Disposal
The grant of a lease is a part disposal for CGT purposes. A chargeable gain or allowable loss can arise even where no premium is paid (e.g. where only a rack rent is charged, a capital loss may arise).
2. Long Leases (over 50 years) vs Short Leases (50 years or less)
The distinction between long and short leases is fundamental:
- A short lease (50 years or less to run) is a wasting asset for CGT purposes.
- A long lease (over 50 years) is not a wasting asset and is treated more like a freehold for CGT purposes.
3. Short Leases as Wasting Assets — Wasting of Allowable Expenditure
Because a short lease is a wasting asset, its value does not decline uniformly. The rate of decline is slow at first but accelerates sharply in the final years. Accordingly, the straight-line wasting method in TCGA92/S46 is disapplied, and instead the allowable expenditure is wasted using the special table and formulae in TCGA92/Sch 8/Para 1. These rules apply if the lease was a short lease at the date of disposal, even if it was a long lease when originally acquired.
4. Grant of a Short Lease out of a Freehold or Long Lease
Where a short lease is granted out of a freehold or long lease, the A/(A+B) part disposal formula in TCGA92/S42 applies, but with a special modification: the "A" in the numerator is the portion of the premium not chargeable as property income, while the "A" in the denominator is the full premium.
5. Grant of a Short Lease out of a Short Lease
Where a short lease is granted out of another short lease, different rules apply:
- The part disposal formula in TCGA92/S42 does not apply.
- The full premium is taken as consideration for CGT, even though part may be chargeable as property income — a deduction for the property income element is made after calculating the gain (but cannot turn a gain into a loss or increase a loss).
- Allowable expenditure is reduced if the rent under the sub-lease exceeds the rent under the original lease.
- Where only part of the land is sub-let, allowable expenditure is further reduced.
6. Interaction with Property Income (Premiums)
A premium on a lease of 50 years or less is partly chargeable to income tax as property income. The shorter the lease, the greater the proportion treated as income. If the lease exceeds 50 years, none of the premium is treated as income. The income element must be stripped out of the CGT computation to avoid double taxation.
7. Anti-Avoidance: Assignment of Short Lease Granted at Under-Value
Where a short lease is assigned having been granted at less than market value, ITTOIA 2005/S282 (or CTA 2009/S222 for companies) imposes an income tax charge. Crucially, TCGA92/Sch 8/Para 6(2) disapplies the normal rule in TCGA92/S37 (which would otherwise exclude income-taxed amounts from CGT). This means the full consideration is taken into account for CGT purposes in these circumstances.
8. Reverse Premiums
On the grant, assignment or surrender of a lease, a reverse premium (i.e. a premium moving from landlord to tenant on grant, from assignor to assignee on assignment, or from tenant to landlord on surrender) does not count as chargeable consideration for CGT.
9. Leases for Life
Leases for life (and leases for periods ascertainable by reference to death) are treated as settled property for IHT, but this treatment does not apply for CGT. The termination of such a lease is treated in the same way as any other lease expiry.
Citation sources
Leases for life and other leases which are for periods ascertainable by reference to death are treated as settled property for the purposes of IHT. This treatment however does not apply for CGT. In general the termination of the lease, whether on death or within a predetermined period after death, would be treated in the same way as any other case where a lease expires. See CG71300.
As with the grant of any lease, the grant of a short lease out of a freehold or long lease is a part disposal. However, in applying the A / (A + B) part disposal formula in TCGA92/S42, a special rule must be observed. The A in the numerator (the top part of the fraction) is the amount of the premium not chargeable as property income. The A in the denominator (the bottom part of the fraction) is the full amount of the premium. The amount chargeable to property income is not deducted in arriving a
This section deals with the Capital Gains Tax consequences of the granting of a lease. As explained in CG70770, the granting of a lease is the part-disposal of the freehold or leasehold interest held by the grantor. A chargeable gain or allowable loss will arise on the grant of a lease. There are three basic situations which are commonly met: where a premium is paid; where no premium is paid because the rent charged under the lease is a rack rent, see CG70751; where the lease is granted otherwis
Where a short lease, that is a lease for a term of not more than 50 years, is granted out of a short lease, a number of special rules apply. The part disposal formula in TCGA92/S42 does not apply, see CG71001. The full amount of any premium is taken as the consideration for CGT purposes, even though part of that premium will be chargeable as property income. A deduction for the amount chargeable as property income is then made after calculating the gain, see CG71004. However, this deduction cann
ITTOIA 2005/S282 is an anti-avoidance provision which imposes a charge to Income Tax on an unincorporated UK property business in certain circumstances when a short lease is assigned, having been granted for less than its market value. CTA 2009/S222 is an equivalent provision relating to incorporated UK property businesses. (See PIM1200). Although TCGA92/S37 generally excludes from the computation for CGT purposes any amounts which have been charged to Income Tax, this does not apply to any amou
A short lease of land is a wasting asset, but its value does not waste uniformly over its term. At first, the rate of decline in value is relatively slow but it becomes very rapid during the last few years of the term of the lease. Hence, the straight-line method of wasting expenditure contained in TCGA92/S46, see CG76772 onwards, is not appropriate and is disapplied by TCGA92/Sch 8/Para 1 (3). Instead, the allowable expenditure is wasted in accordance with the table in TCGA92/Sch 8/Para 1 and t
On the grant, assignment or surrender of a lease a reverse premium does not count as chargeable consideration. A reverse premium means in relation to the grant of a lease, a premium moving from the landlord to the tenant in relation to the assignment of a lease, a premium moving from the assignor to the assignee in relation to the surrender of a lease, a premium moving from the tenant to the landlord.
A premium paid for a very long lease is clearly a capital sum. If it is paid for a shorter lease it has a character more like rent paid in a lump sum rather than periodically. It is more akin to income, and the shorter the lease, the more like income it is. The Taxes Acts charges a proportion of a premium to tax as income. The proportion to be charged as income depends on the length of the lease. The shorter the lease, the greater the proportion to be charged. If the lease is for more than 50 ye
A ‘short lease’ is a lease with 50 years or less to run. Such a lease is a wasting asset for CGT purposes. Short leases are the subject of a number of special rules which are covered in detail later in these instructions.