Tax for renew lease

jimmylau8080

I going to receive my new 999-year lease with no ground rent payable is given to the leaseholder, after I paid around £7,000 to extend my current flat from 89 years lease to a 999-year lease with no ground rent payable.

I received a piece of advice that there are income tax implications. If matters are arranged so that a new 999-year lease with no ground rent payable is given to the leaseholder, his understanding is that the leaseholders are already aware that something of value is being given to them. In tax terms, this value is being moved out of the company and is being given to the shareholder. This movement of value is known as a deemed distribution, for income tax purposes. A distribution is taxed on the individual as if it was a dividend and each leaseholder would have to declare the distribution on their tax return and pay the additional amount of income tax that arises. This may be 7.5%, 32.5%, or 38.1%, or indeed a mix of those rates.

Isn't true that I need to pay this as a dividend tax above. I was very confused because I already paid £7,000 to extend my current flat lease. Why do I need to pay this as tax (That flat is my private resident since 2013)?

AdrianC

As leaseholder, you have bought something - an extension for your lease. You have paid the freeholder £7k for that. It's that simple...

Unless... Are you also part-owner of the freehold? Via a limited company? If so, what has the freehold ltd company done with the revenue they've received? Paid it as a dividend to the shareholders? Then, yes, your portion of that dividend would be liable to income tax as with any other dividend from any other limited company you owned shares in. If the company has retained the funds, then there's nothing for you to be taxed on.

jimmylau8080

AdrianC said:

As leaseholder, you have bought something - an extension for your lease. You have paid the freeholder £7k for that. It's that simple...

Unless... Are you also part-owner of the freehold? Via a limited company? If so, what has the freehold ltd company done with the revenue they've received? Paid it as a dividend to the shareholders? Then, yes, your portion of that dividend would be liable to income tax as with any other dividend from any other limited company you owned shares in. If the company has retained the funds, then there's nothing for you to be taxed on.

Thanks for the advice. Yes, we brought it together. So, we will be part-owner of the freehold. The £7,000 leasehold (my flat only) payment paid is liable to dividend tax because I owned that freehold (my flat only) now which is a lot and confused e further.
So, I need to pay around £1,800 tax because I am the freehold now?

SDLT_Geek

Sometimes the company holds the freehold as “nominee” for the leaseholders.  So the freehold is not an asset of the company.  This can mean that the dividend issue does not arise.

Sometimes, how the company is to hold the freehold, is set out in a participation agreement made between the lessees.

AdrianC

jimmylau8080 said:

AdrianC said:

As leaseholder, you have bought something - an extension for your lease. You have paid the freeholder £7k for that. It's that simple...

Unless... Are you also part-owner of the freehold? Via a limited company? If so, what has the freehold ltd company done with the revenue they've received? Paid it as a dividend to the shareholders? Then, yes, your portion of that dividend would be liable to income tax as with any other dividend from any other limited company you owned shares in. If the company has retained the funds, then there's nothing for you to be taxed on.

Thanks for the advice. Yes, we brought it together. So, we will be part-owner of the freehold. The £7,000 leasehold (my flat only) payment paid is liable to dividend tax because I owned that freehold (my flat only) now which is a lot and confused e further.
So, I need to pay around £1,800 tax because I am the freehold now?

Let's go back a step...

Your flat is leasehold. You own the lease on that flat.

The building which contains the flats is freehold.
Do you part-own that building, as well as your individual flat?
If so, how many other people also own it?
If, say, five - then did you receive 1/5 of your £7,000 back?

jimmylau8080

SDLT_Geek said:

Sometimes the company holds the freehold as “nominee” for the leaseholders.  So the freehold is not an asset of the company.  This can mean that the dividend issue does not arise.

Sometimes, how the company is to hold the freehold, is set out in a participation agreement made between the lessees.

Does it mean how they set-up the company will decide I need to pay the dividend tax based on the freehold I brought?

eddddy

Are you sure you mean you paid £7k to extend your lease?

Or do you mean you paid £7k to the freehold company you jointly formed, so the company could buy the freehold - and as a result the freehold company is giving you a lease extension for free?

jimmylau8080

eddddy said:

Are you sure you mean you paid £7k to extend your lease?

Or do you mean you paid £7k to the freehold company you jointly formed, so the company could buy the freehold - and as a result the freehold company is giving you a lease extension for free?

May I know what is the difference? 
The freehold company was owned by a pension investment company. After we purchased it, they will transfer our share of the freehold to all flat owners (Half of us, including me, have this as a private resident). I did check the company they formed. It does have my name on it.

jimmylau8080

AdrianC said:

jimmylau8080 said:

AdrianC said:

As leaseholder, you have bought something - an extension for your lease. You have paid the freeholder £7k for that. It's that simple...

Unless... Are you also part-owner of the freehold? Via a limited company? If so, what has the freehold ltd company done with the revenue they've received? Paid it as a dividend to the shareholders? Then, yes, your portion of that dividend would be liable to income tax as with any other dividend from any other limited company you owned shares in. If the company has retained the funds, then there's nothing for you to be taxed on.

Thanks for the advice. Yes, we brought it together. So, we will be part-owner of the freehold. The £7,000 leasehold (my flat only) payment paid is liable to dividend tax because I owned that freehold (my flat only) now which is a lot and confused e further.
So, I need to pay around £1,800 tax because I am the freehold now?

Let's go back a step...

Your flat is leasehold. You own the lease on that flat.

The building which contains the flats is freehold.
Do you part-own that building, as well as your individual flat?
If so, how many other people also own it?
If, say, five - then did you receive 1/5 of your £7,000 back?

The freehold company was owned by a pension investment company. After we purchased it, they will transfer our share of the freehold to all flat owners (Half of us, including me, have this as a private resident). I did check the company they formed. It does have all of our name on it. 

greatcrested

So you and the other flat owners jointly purchased the freehold from the pension investment company.

1) how many flat owners (leaseholders)?

2) is that what you paid £7000 for? And was £7000 the total price for the freehold, or was that just your share?

jimmylau8080

greatcrested said:

So you and the other flat owners jointly purchased the freehold from the pension investment company.

1) how many flat owners (leaseholders)?

2) is that what you paid £7000 for? And was £7000 the total price for the freehold, or was that just your share?

Hi 

1) how many flat owners (leaseholders)?
26 flat owners

2) is that what you paid £7000 for? And was £7000 the total price for the freehold, or was that just your share?
The £7,000 is the fee for my share of freehold (for my flat only). Some of them buy more than one portion as not all flats owners are participating. For me, I only buy my portion. I can see my name is in the new company which they just form and it did say I have a portion of my share in the company because I am the share of freehold (for my flat only)