Tag Archives: tax

Am I going to pay tax on a lease extension as a landlord?

I am a freeholder.  The flat owner is going to pay me a premium to extend his lease. Am I going to pay any tax on that?

The answer to this is that ‘it depends.’

Assuming that there will be a capital gain on the disposal when the lease is granted then the answer is probably ‘yes’.

The exception may be a situation where a Notice is served under the legislation and you are able to ‘roll over’ the gain because you plan to reinvest in another qualifying asset (ie property) this suits owners of freeholds who act as investor.

If you own an individual freehold or happen to have a leasehold property attached to your freehold property you will receive a lease extension premium then these considerations are unlikely to apply and it is likely that you will have a capital gain to declare on the ‘disposal’ i.e. the sale of the lease to the tenant.

Different considerations apply if you are a freehold company (owned by the flat owners) and you are granting yourselves lease extensions.

Expert advice should be taken as to your tax status which is likely to depend on your own status – (for instance there may be certain exemptions or allowable expenditure that you can take advantage of). For further advice you will need to consult a professional practice with a tax department or an accountant or other tax advisor.

Podcast – Tax and Lease Extensions

I recently recorded a podcast for the website Property Battlefield on the subject of ‘Tax and Lease Extensions’ with my colleague and tax expert Philip Vickery from Bishop & Sewell LLP. This follows on from the article that appears on this site.

You can listen to the full podcast here: http://traffic.libsyn.com/propertybattlefield/FV_Tax_and_Lease_Extensions_mixdown.mp3

Thank you to John Savage for having me on the show. If you anyone wants to discuss any tax issues raised then by all means do email privateclient@bishopandsewell.co.uk

Tax and lease extensions

A lot of people think that once they have purchased their freehold, “that is that” and there is no further action to take. But, they could be wrong.

Why?

Because as a lease is a wasting asset, notwithstanding the fact that you may own the freehold via a share in a company, once the freehold has been purchased, the lease term still continues to diminish.

If you do not take some sort of action to extend the lease to say, 999 years and make it effectively ‘infinite’ then as the lease decreases in value you may be slowly storing up trouble.

Ideally all of the leases for participating flats should be extended at the time of purchase. If this is done (or if it does not need to be done as the leases are already very long) then this problem will not arise. However, if the leases are of ‘modest’ or ‘normal’ length and there is a delay between buying the freehold and extending the leases then there is a risk that this problem will arise.

What is the problem?

Effectively, CGT (Capital Gains Tax) is the problem. If the company grants a lease extension back to the leaseholder and the value of what the leaseholder gets back differs significantly from what was paid to receive this benefit in the first place (i.e. if the value of the lease extension is higher than the ‘cost’ of buying into the freehold), then the company has made a disposal of something of value and may well face a CGT liability.

As the company may have no assets or cash to pay for this (and why would it want to pay this expense on someone else’s behalf?) it will need to have this liability covered off (i.e. paid for by the leaseholder) before the lease extension is granted.

The moral of the story is therefore, don’t delay in extending leases to 999 years after completion, or to ensure that it is a requirement of your participation agreement that this is done.

In certain circumstances, there may be some ‘ways’ around the issue, but these are very much circumstance dependent. It is also likely that the company will need valuation advice. These issues have become the focus of discussion, including a recent debate at the ALEP Conference. in practice, I see a number of tax and enfranchisement issues on a fairly regular basis and freehold company directors should always consider carefully their position in such situations.