Short lease

From CEOpedia | Management online

A short lease is a wasting asset (it has a limited life and loses value over its life). On this account the calculation of the gain arising on the disposure of a short lease ought to be accomplished by making a comparison disposal proceeds with the unexpired fragment of the lease's cost at the time of disposal [1].

Nevertheless, in contrast to other wasting assets, the cost of a short lease is believed to waste away on a straight line basis. In place of the cost of a short lease is deemed to waste away under a table of percentages which is given in Schedule 8 of TCGA 1992 and is replicated at the end of this section. The impact of this table is to write off the cost of a short lease gradually in the early years and more rapidly in the closing years [2].

The ratio of the cost of a short lease which is admitted in the Capital Gains Tax (CGT) calculation on its disposal is [3]:

  • % relating to number of year lease has left to run on disposal : % relating to original length of lease

Providing that the lease was initially a long lease but the ratepayer has owned it for several years so as to the lease now being assigned is a short lease, the denominator in the above fraction is taken as 100%, respondent to ’50 or more’ in the Schedule 8 table. Schedule 8 gives only percentages for entire numbers of years. If the length of a lease is not a whole amount of years, then the suitable percentage is computed from the table on a pro rata basis [4].

Grant of a short lease

The grant of a short lease, or in other words, sub-lease, out of a freehold (or a long head-lease) is for that matter considered as a part disposal for CGT purposes and on this account the part disposal rules apply once more. Nonetheless, a part of the premium obtained on the grant of a short lease is declarable to tax as property income and then, with the aim of avoiding double taxation, the disposal proceeds in the part-disposal calculation are minimised by the quantity of the premium which is declarable as property income [5].

Sale of a short lease

Note the succeedings points regarding the trade of a short list [6]:

  • Disposal of the overall asset (wasting asset)
  • Entire proceeds of trade are considered to be a capital receipt
  • Purchase cost is wasted in compliance with tables

Examples of Short lease

  • Car Lease: A car lease is a form of short lease where the owner (the lessor) rents a car to another party (the lessee) for a predetermined period of time. At the end of the lease, the lessee has the option to either purchase the car for an agreed-upon price or return it to the lessor.
  • Office Space Lease: An office space lease is a type of short lease in which an individual or business rents an office space from a landlord for a set period of time. The agreement between the two parties outlines the terms of the lease, such as the length of the lease, the amount of rent due each month, and the responsibilities of both parties.
  • Apartment Lease: An apartment lease is a short lease in which an individual or family rents an apartment from a landlord for a set period of time. The agreement between the parties outlines the terms of the lease, such as the amount of rent due each month, the length of the lease, and the responsibilities of both parties.

Advantages of Short lease

Short leases come with a number of advantages, including:

  • The ability to acquire the use of an asset for a shorter period of time, therefore, enabling the lessee to save money on the long-term costs associated with a longer lease.
  • The flexibility to terminate the lease agreement if the lessee no longer needs the asset or if the lessee's needs change.
  • The possibility of negotiating the terms of the lease, such as the length of the lease or the amount of rent to be paid.
  • The potential to take advantage of short-term fluctuations in the market, as the lease can be terminated if the market turns unfavorable.
  • The opportunity to benefit from tax deductions, as the lessee is entitled to claim depreciation of the leased asset.

Limitations of Short lease

The main limitations of short leases can be summarised as follows:

  • Reduced flexibility: Short leases generally have more restrictive terms than longer leases, meaning that the tenant may not have the flexibility to make changes to the premises or to move out of the lease earlier than the expiration date.
  • Higher costs: Short leases often come with higher rental costs than longer leases, as there is less time for the tenant to amortize the cost of the lease.
  • Unpredictability: The tenant may not be able to predict the future market rate for the same property after their lease expires, making it difficult to budget ahead of time.
  • Lack of security: Short leases provide less security for the tenant, as the lease could be terminated at any time without the tenant's consent, or the lease could be renewed on less favourable terms.
  • Limited opportunities for subleasing: Tenants may not have the opportunity to find a sublessee to take over the remaining part of the lease, making it difficult to recoup some of the costs associated with the lease.

Other approaches related to Short lease

A short lease is a wasting asset (it has a limited life and loses value over its life). As such, there are a number of approaches to calculating the gain arising from the disposal of a short lease:

  • The first approach is to compare disposal proceeds with the unexpired fragment of the lease's cost at the time of disposal. This approach takes into account the fact that the value of the lease has decreased over time and may not reflect the value at the time of acquisition.
  • A second approach is to compare the disposal proceeds with the original cost of the lease. This approach does not take the time factor into consideration, and may overestimate the gain.
  • A third approach is to compare the disposal proceeds with the current market value of the lease. This approach is the most accurate, taking into account both the original cost and the decrease in value due to the passage of time.

In conclusion, the most accurate measure of the gain arising from the disposal of a short lease is to compare the disposal proceeds with the current market value of the lease.

Footnotes

  1. ↑ Melville A, (2008), p. 281
  2. ↑ Nightingale K, (2002/2003), p. 324
  3. ↑ Melville A, (2008), p. 281
  4. ↑ Melville A, (2008), p. 281
  5. ↑ Nightingale K, (2002/2003), p. 328
  6. ↑ Courtney P, Condell M, (2011), p. 238


Short lease — recommended articles
Insured value — Effective rent — Long term lease — Implicit interest rate — Forced sale value — Yield maintenance — Life Cap — Common area maintenance — Net cost

References

Author: Paulina Matysiewicz

Retrieved from "https://ceopedia.org/index.php?title=Short_lease&oldid=96731"