Taxation of leasehold extensions

SwimmingWithHungrySharks

The nine leaseholders of the nine flats in a converted house wish to extend their 82-year leases. The leaseholders also own the freehold through a management company in which they each have one share. The freehold was bought by the management company 40 years ago. The leaseholders have received advice that if their freehold company extends the leases (say to 999 years), this will technically be seen as the company buying back the existing leases and selling on the new leases. The transactions could be viewed by HMRC as making capital gains, even if no actual money has changed hands. HMRC might charge corporation tax on the gains. The total sum would be considerable, being corporation tax on the difference between the sale prices of the leases 40 years ago and the value of new leases now. The leaseholders as shareholders would be liable for the corporation tax, which could be even more expensive than the decline in value of the wasting leases. This cannot be a unique case. Has anyone relevant experience, and did HMRC charge corporation tax along he lines described above.

NameUnavailable

Who gave you this advice? The freeholder can't buy back the leases (that would essentially mean all flats being sold back which would involve the relevant mortage companies and leaseholders vacating their premises on completion). Speak to a solicitor experience in lease extensions.

SwimmingWithHungrySharks

My mistake on the legal language. The advice was that if the freehold company extends the leases, this is treated in law as the leaseholders surrendering their leases and the freeholder granting new leases. And the total value of the new leases could be treated as a gain by the freeholder, on which corporation tax could be due. When I speak, informally so far, to a solicitor they explain how to extend the lease but decline to comment on tax. When I speak, informally so far, to an accountant, they explain how tax might be levied on a gain by the freehold company, but decline to comment on whether the gain from a lease extension amounts to the total value of the new leases. I also tried the leasehold advisory service but they declined to comment on tax. I tried to ask HMRC but I have not managed to find a way to do so. This cannot be a new question so there should be an answer somewhere. But where?

Grumpy_chap

SwimmingWithHungrySharks said:

The nine leaseholders of the nine flats in a converted house wish to extend their 82-year leases. The leaseholders also own the freehold through a management company in which they each have one share. The freehold was bought by the management company 40 years ago. The leaseholders have received advice that if their freehold company extends the leases (say to 999 years), this will technically be seen as the company buying back the existing leases and selling on the new leases. The transactions could be viewed by HMRC as making capital gains, even if no actual money has changed hands. HMRC might charge corporation tax on the gains. The total sum would be considerable, being corporation tax on the difference between the sale prices of the leases 40 years ago and the value of new leases now. The leaseholders as shareholders would be liable for the corporation tax, which could be even more expensive than the decline in value of the wasting leases. This cannot be a unique case. Has anyone relevant experience, and did HMRC charge corporation tax along he lines described above.

SwimmingWithHungrySharks said:

My mistake on the legal language. The advice was that if the freehold company extends the leases, this is treated in law as the leaseholders surrendering their leases and the freeholder granting new leases. And the total value of the new leases could be treated as a gain by the freeholder, on which corporation tax could be due. When I speak, informally so far, to a solicitor they explain how to extend the lease but decline to comment on tax. When I speak, informally so far, to an accountant, they explain how tax might be levied on a gain by the freehold company, but decline to comment on whether the gain from a lease extension amounts to the total value of the new leases. I also tried the leasehold advisory service but they declined to comment on tax. I tried to ask HMRC but I have not managed to find a way to do so. This cannot be a new question so there should be an answer somewhere. But where?

Who gave you this advice?
Exactly what questions were asked, informally, of the Solicitor and the Accountant?
It is quite possible that if the Accountant was asked the incorrect question, then the answer would also be incorrect for the reality.

The leaseholder wish to extend the existing lease, not to forfeit the existing lease and take a new lease.  If the leases are currently 82-years remaining and the leases are extended by 999-years, the leases will then have 1,081-years remaining.  The same existing leases, just with a longer term remaining.
Speak with a Solicitor that is experienced in lease-extensions.  There should be no need to engage an Accountant.

eddddy

I think there's some misleading info in the replies to this thread...

•  A lease extension for a 'share of freehold' flat will almost always involve a surrender of the current lease, and a re-grant of a new lease. (Typically, both 'old' and 'new' leases have exactly the same terms - except for the lease length and ground rent)

FWIW, you'll find lots of trustworthy places on the internet that explain this, for example:

In most cases, your lease will be extended by way of a surrender and regrant: as the name implies, you simply surrender your current lease and are granted a new lease on the same terms as the previous lease except for the lease’s length, which is extended.

Link: https://www.starckuberoi.co.uk/share-of-freehold-property-lease-extension/

• In certain circumstances, the surrender and regrant of the lease can trigger Capital Gains Tax Liability

Again, FWIW, you'll find lots of trustworthy places on the internet that explain this, for example:

Lease extensions and Capital Gains Tax

Lease extensions are treated as disposals under the Capital Gains Tax regime.

If the company grants a lease extension back to the leaseholder long after the building was purchased, the value of the lease extension could now significantly differ to the cost put in at the time of purchasing the freehold. It could be interpreted that the company has made a disposal of something of value and could face a CGT liability.  It is unlikely that the company will be able to pay the CGT liability and will look to the leaseholders to pay this.

Link: https://www.russell-cooke.co.uk/insight/briefings/2021/tax-implications-for-999-year-lease-extensions

SwimmingWithHungrySharks

Thanks all. I have found documentation (can't remember whether on the Leasehold Advisory Service, the Land Registry, or HMRC) confirming that a lease extension is treated legally as the surrender of the lease and the issue of a new lease on the same terms but with a longer duration. And taking the advice quoted above, this will mean that the freehold company has made disposals of value. So the freeholder will have made a capital gain that, as it is a company, will be liable to corporation tax. The question becomes what is the measure of the gain? Is it the difference between the total value of the leases on the day that the freehold company bought the freehold and their total value on the day of the extension; or is it the difference between the total of the prices most recently paid by the leaseholders for their current leases and the total value of the new leases on the day that the extension is made; or is it the difference between the total value of the existing leases on the day the extension is made and the total value of the new leases on the same day, which could be determined by an authoritative independent valuer? The quote above implies the first of these; the advice that I referred to above suggested that it should be the second; i would seem most sensible that it should be the third. If it is the first, then the corporation tax would be massive, being based on the appreciation in the total value of nine residential properties over 40 years. If it is the second, then the corporation tax would still be a lot, as the leases were variously last bought between 40 years ago and two years ago. If it is the third, then the corporation tax would be more reasonable being based on the difference in the values of nine residential properties with 82-year leases and the  same properties with (say) 125-year leases. Surely it must be the third? If only I could just ask HMRC.