On 1 August 2006 X Ltd granted a 20-year lease to Y Ltd on the following terms:

• An annual rental of £20,000, payable quarterly in advance on 1 August, 1 November, 1 February and 1 May each year.

• A premium of £80,000 payable by Y Ltd on 1 August 2006.

On 1 April 2009, Y Ltd intends sub-letting the premises to Z Ltd on the following terms:

• A term of five years, at the end of which Y Ltd will resume occupancy.

• An annual rental of £28,000, payable in advance each year on 1 April.

• A premium of £45,000 payable by Z Ltd on 1 April 2009.

You are required:

(a) To compute, for the year to 31 March 2007, the amount of property income assessed to corporation tax on X Ltd and the amount of the premium which Y Ltd may deduct in arriving at its trading profits chargeable to corporation tax. Assume that both companies make up accounts annually to 31 March.

(b) To compute the amount of property income assessed to corporation tax on Y Ltd for its year to 31 March 2010.

(c) To comment briefly on the capital gains implications of the above transactions.