66 years remaining

pinchmyself

I intend to put my leasehold flat into auction at some point in the future. Currently there is 66 years remaining on the lease. I have mortgage deal that should I pay it off now, has a penalty clause of around 7k. So I'm trying to work out if a 63 -64  year lease will devalue by more than 7k over a two to three year period. Also if mortgage lenders from a buyers point of view will be reluctant to lend on a property with only 63 -64 years left on a lease. It's difficult to know whether to take the 7k hit now or wait two to three years before I put it up for sale. Before you ask, there is no point in paying the 50K to extend the lease as I will only pay more CGT

gwynlas

Mortgage lenders want lease lengths of over 70 years so it will be seriously disvalued.
You could start thee process of extension and either pay for it yourself or include it at point of sale.

eddddy

pinchmyself said:

So I'm trying to work out if a 63 -64  year lease will devalue by more than 7k over a two to three year period.

You can do this, to get a reasonable idea...

• Put the (correct) numbers into an online lease extension calculator - to get an idea of what a statutory lease extension would cost today, with 66 years left on the lease

• Adjust the expiry date of the lease in the calculator, to make it seem like there are only 64 years left on the lease - to get an idea of what a lease extension would cost when there are only 64 years left on the lease

You can try this online calculator: https://www.lease-advice.org/calculator/

But there is talk of changes to legislation which might (or might not) make your lease extension cheaper in 2 years time.

pinchmyself said:

I intend to put my leasehold flat into auction...

if mortgage lenders from a buyers point of view will be reluctant to lend on a property with only 63 -64 years left on a lease. 

66 years remaining will already be difficult to mortgage - 63 or 64 years won't make much difference.

But if you're selling at conventional auction, it's extremely difficult for buyers to get a mortgage - realistically those auctions are for cash buyers only.

pinchmyself said:

Before you ask, there is no point in paying the 50K to extend the lease as I will only pay more CGT

Do you mean because the lease extension (regrant of the lease) will trigger a CGT payment? I don't think that's the case - but I'm not a tax expert.


Otherwise, you pay CGT on profit (or gain).

So if you pay £50k for a lease extension, and as a result the flat sells for £90k more - the resulting profit is £40k.

So it's true that you have to pay CGT on the £40k profit - but you get to keep the remainder of the £40k profit.



(Out of interest, where did you get the £50k lease extension cost from? Was it an online calculator?)

mlz1413

I assume you will auction as you know any buyer is going to need to be a cash buyer. But you could find a buyer via an estate agent too, you would have more control over the price.

You say an early mortgage fee will be due if you sell now of approx 7k, but if you keep the mortgage going for 2 years how much are you going to pay... 4 to 5k?

I have this dilemma with a leasehold flat I bought 20 years ago.  If I renew the lease it's so much money I would have to remortgage.  If I sell the CGT would take a massive chunk.  So I keep coming to the conclusion it's bringing in far more rent than the left over lump sum would earn and just to keep it for my life time. 

pinchmyself

Thank you all for your very thoughtful and useful advice. eddddy I've used the extension calculator putting in the different lengths of lease. Over a two year period the difference is around a £3000 increase in extension cost. Take this off from the £7000 penalty for early repayment, so realistically it would cost me £4000 to sell now. However the negotiation time to agree the figure with the freeholder could be at least 12 months, so all in all these amounts are quite small. I bought the property for £85K back in 1991, it's currently valued with a 99 years lease at £495,000. So as you see I have a substantial CGT exposure.  It produces £27k a year in rental, although at the moment why I am looking at this, the current tenant is in some financial difficulty. So I am weighing up is it time to sell, or as mlz1413 suggests, keep it for my lifetime and re-let whilst I can use the Section 21 notice should this tenant default on the rent. At a figure of £495,000 the figure gleaned from the lease extension calculator on the LVT website suggests it would cost between £54-57,000 to extend. Once again, than you all.....I need to give this some thought

eddddy

pinchmyself said:

it's currently valued with a 99 years lease at £495,000. So as you see I have a substantial CGT exposure. 

Yes - but as I understand it, you pay CGT when the property is eventually sold, not when you extend the lease. Has somebody told you otherwise?

And lease extension costs are allowable against CGT.

And extending the lease (at a fair price) should always make a profit for you.

So if you can afford to extend the lease, it should be a 'no brainer' to go ahead and do it.

pinchmyself said:

it's currently valued with a 99 years lease at £495,000. 

Just to make sure - why are you mentioning a 99 year lease? A statutory lease extension would add 90 years to the lease term making it 156 years.

Are you negotiating an informal lease extension to 99 years with your freeholder? If so, you need to be a bit more careful. For example, how much is your current ground rent, and is your freeholder proposing to reduce it to zero?




Edit to add...

Thinking further, I wonder if this is the cause of your concern about CGT...

If you are considering extending your lease from 66 years to 99 years - that's an extension of 33 years.

I believe that lease extensions of less than 50 years are not considered to be capital costs. So the costs aren't allowable against CGT.

So you either need to go for a Statutory Lease Extension of 90 years, or negotiate an informal lease extension of at least 50 years with your freeholder.

But I'm not a tax expert, so check that with others.

newsgroupmonkey_

At this stage, there's absolutely no reason why you can't send a Section 21 now.

If the tenant defaults on the rent, you would send them a Section 8, which can get them out much quicker.

pinchmyself

eddddy said:

pinchmyself said:

it's currently valued with a 99 years lease at £495,000. So as you see I have a substantial CGT exposure. 

Yes - but as I understand it, you pay CGT when the property is eventually sold, not when you extend the lease. Has somebody told you otherwise?

And lease extension costs are allowable against CGT.

And extending the lease (at a fair price) should always make a profit for you.

So if you can afford to extend the lease, it should be a 'no brainer' to go ahead and do it.

pinchmyself said:

it's currently valued with a 99 years lease at £495,000. 

Just to make sure - why are you mentioning a 99 year lease? A statutory lease extension would add 90 years to the lease term making it 156 years.

Are you negotiating an informal lease extension to 99 years with your freeholder? If so, you need to be a bit more careful. For example, how much is your current ground rent, and is your freeholder proposing to reduce it to zero?




Edit to add...

Thinking further, I wonder if this is the cause of your concern about CGT...

If you are considering extending your lease from 66 years to 99 years - that's an extension of 33 years.

I believe that lease extensions of less than 50 years are not considered to be capital costs. So the costs aren't allowable against CGT.

So you either need to go for a Statutory Lease Extension of 90 years, or negotiate an informal lease extension of at least 50 years with your freeholder.

But I'm not a tax expert, so check that with others.

I never realised that the lease extension costs are allowable against CGT.  Also I was of the view that to extend the lease you would extend it back to the original 99 years, not add 90 years to the remaining amount on the original lease. So am very grateful for that nugget of knowledge

I am debating whether to re - let or sell, given my age etc etc

pinchmyself

newsgroupmonkey_ said:

At this stage, there's absolutely no reason why you can't send a Section 21 now.

If the tenant defaults on the rent, you would send them a Section 8, which can get them out much quicker.

She has underpaid by almost 50% of the monthly rent for the last two months, so is already in arrears

RAS

Do research the grounds for section 8 notices. Some allow the tenant to scupper eviction by bring the rent arrears down to £1 below 2 months rent before the court hears the case, other cover persistent rent arrears.

RHemmings

pinchmyself said:

eddddy said:

pinchmyself said:

it's currently valued with a 99 years lease at £495,000. So as you see I have a substantial CGT exposure. 

Yes - but as I understand it, you pay CGT when the property is eventually sold, not when you extend the lease. Has somebody told you otherwise?

And lease extension costs are allowable against CGT.

And extending the lease (at a fair price) should always make a profit for you.

So if you can afford to extend the lease, it should be a 'no brainer' to go ahead and do it.

pinchmyself said:

it's currently valued with a 99 years lease at £495,000. 

Just to make sure - why are you mentioning a 99 year lease? A statutory lease extension would add 90 years to the lease term making it 156 years.

Are you negotiating an informal lease extension to 99 years with your freeholder? If so, you need to be a bit more careful. For example, how much is your current ground rent, and is your freeholder proposing to reduce it to zero?




Edit to add...

Thinking further, I wonder if this is the cause of your concern about CGT...

If you are considering extending your lease from 66 years to 99 years - that's an extension of 33 years.

I believe that lease extensions of less than 50 years are not considered to be capital costs. So the costs aren't allowable against CGT.

So you either need to go for a Statutory Lease Extension of 90 years, or negotiate an informal lease extension of at least 50 years with your freeholder.

But I'm not a tax expert, so check that with others.

I never realised that the lease extension costs are allowable against CGT.  Also I was of the view that to extend the lease you would extend it back to the original 99 years, not add 90 years to the remaining amount on the original lease. So am very grateful for that nugget of knowledge

I am debating whether to re - let or sell, given my age etc etc

I did not realise that either. That makes a short lease flat a more attractive prospect. 

https://homehold.org/standard-article/are-lease-extensions-tax-deductible

It would be a complicated calculation however. If the value of the flat increases more than the cost of the lease extension, then some CGT may end being paid. (If not a primary residence, etc.)