How do I create a lease without triggering CGT or SDLT?

If you own the property via a company ... create a "daughter company" owned by the first. Then you can 'transfer' the flats (by way of new leases) to the daughter company. The transfer is not a sale and thus no SDLT.
If you own in personal names it's trickier, but the transfer not sale argument still applies.

Having said that - I am a lease creation and leasehold expert, not a SDLT expert. But I've seen it done many times.

Hi Sean. Your advice is incomplete. It is correct that the Landlord & Tenant cannot be the same party (person, company, trust etc). There is no compulsion to create the 5th lease however. So you own the flat freehold, which is subject to 4 other leases. Therefore no SDLT and CGT confined to the gain on the sale of the other 4. Development costs can be offset against CGT anyway. Some mortgagees would lend on freehold flats - make enquiries before taking the plunge.
You can avoid leases altogether by selling commonhold units. This for illustration only, I have no experience in this and you need specialist advice on the subject.
By selling four fifths of the property you are vulnerable. The other 4 could take over management and/or the freehold.
Often share of the freehold works poorly because people have different priorities or agendas. Most common problems are failure to take responsibility, prioritization of trivial matters over the serious, not wanting to spend money etc.
Mike

Hi Sean,

I’ve been wrestling with this issue as well. I want to create leases on a rented property (five rented flats without currently any leases).

In your case, it sounds like you could sell four flats on new leases. You should be able to offset the development costs (as well as an apportionment of the purchase value) for each flat you sell. CGT will kick in on the remaining profit.

Once you’ve done that, the remaining value of the freehold will be much lower.

You could then transfer the freehold into a limited company. The tricky bit seems to be that ideally you would set up the remaining flat lease before you transfer the freehold, because then the residual freehold value really is low. Or maybe the two things can be done simultaneously.

You could then give each grade holder a share of the freehold eventually.

I’m looking at how to use interspousal transfer rules to help this along. Maybe put the freehold in one name and the leases in another. Transfers between spouses should be tax-exempt, though no doubt the devil is in the detail.

I’m not sure how it works if you’re not married.

Lenders don’t seem to like lending to blocks. They prefer individual flat leases to lend against. I suppose the sale process in the event of a default is a lot simpler.

My buildings is not currently mortgaged, but I’d like to have the option.

Good points Mike. Sean - you need to start with the end picture in mind and work back from there. Whether you're keeping the flats, or selling them on, or whatever ... will determine the financing ... which will determine the first steps.

You don’t mention if the entire development is currently subject to a mortgage. If so it is a bit tricky due to the fact that your current lender holds every part as security and will not release it in order for you to make legal changes such as creating leases.

We’ve been in this position during the latter part of the crash. We had a business loan secured on a freehold block comprising terraces, and maisonettes. We weren’t selling and weren’t able to get another freehold mortgage over the whole site (which of course you can now). So we were kind of in the place of both buyer and seller.

We created a company to “hold” the freehold which would eventually be left after the creation of all the leases. The remaining freehold was pretty valueless and so didn’t create any tax obligations at transfer. My husband and I owned the leases and were directors of the freehold company, so it was an exercise on paper only really. If you are planning to retain ownership of one of the flats you may also wish to retain full control of the freehold.

As no single lender would lend on more than two properties in the same development it meant that we had to deal with several lenders and solicitors (as will you as the seller).

We had to repay the full amount received from each lender on completion in order for our existing lender to release that property and the lease had to be registered on completion. All progressed at snails pace, but it did progress until one of the lenders insisted the lease be registered prior to completion, which meant that we had to remortgage another property in order to obtain the funds to repay the remaining debt on the loan and release the security on the final property so we could register the lease and finally complete the remortgage. It’s not something I’d ever wish to undertake again, but it achieved the objective.

Obviously if you don’t have finance outstanding on your development you’ll find it far simpler to first create and register the leases and transfer the remaining freehold to a company which can be created online in minutes. Your solicitor can do this all for you at once.

You can go online and search for freehold valuation calculators to help you set a value on it, but without any dwellings included and limited uses available the only value is in the ground rents and I think we transferred our freehold title for £1,000.

You will only have to consider your CGT from the sales of the leases and of course the legal costs of all the work.

I hope I’ve explained that clearly.

Reply to the comment left by Kate Mellor at 15/05/2021 - 06:40
Hi Kate, thanks for your interesting post. I wonder whether from your experience you can clarify one thing regarding the creation of the freehold company.

If the freehold company is created before the leases are written, it is presumably quite valuable because it still holds all the property. So the transfer of ownership to the new company would presumably trigger a CGT liability.

So we’d want to create the leases first.

But the issue I foresee is how to do that if the leases cannot be in the same names as the freeholder.

In other words, how can Mr and Mrs X create leases in their own names when Mr and Mrs X still own the feeehold?

Were you able to resolve this?

We created the company first and then wrote the leases showing the landlord/freeholder as the company created for the purpose .

As you are selling your first lease will be in your purchasers name and assuming your solicitor advises it’s okay you can do first registration on completion of the sale, unless they advise you to create and register each lease in your own name first and then sell.

Our transfer of the freehold wasn’t registered until all the leases were created and transferred and the value was removed from the freehold. In fact our solicitor actually neglected to register the freehold transfer until over 12 months later when we noticed that the land registry records hadn’t been updated. You do have to check these things. This is actually the second time in about 5 years something like that has happened to us.

Reply to the comment left by Kate Mellor at 15/05/2021 - 14:57
We don’t necessarily want to sell leases to third parties initially, but just have five leasehold units that can be used to secure individual mortgages.

It sounds like you first transferred the whole value of the building into a freehold company, and then created leases.

That would seem to create a large CGT liability. It’s the same issue we encountered when people were pushing the idea of putting the business into a limited company to counter-act the loss of tax relief on mortgage interest.

I don’t mind paying CGT, but there has to be a genuine sale attached. Otherwise, there’s no cash to pay the tax bill with!

Reply to the comment left by Christopher Rogal at 15/05/2021 - 15:48
Whoops posted my comment twice.

Actually, re-reading your comment seems to tell me you created leases first but they were created for the third-party purchaser to hold.

I would want the leases still to be held by the people who are currently the freeholders.

Reply to the comment left by Kate Mellor at 15/05/2021 - 14:57
We don’t necessarily want to sell leases to third parties initially, but just have five leasehold units that can be used to secure individual mortgages.

It sounds like you first transferred the whole value of the building into a freehold company, and then created leases.

That would seem to create a large CGT liability. It’s the same issue we encountered when people were pushing the idea of putting the business into a limited company to counter-act the loss of tax relief on mortgage interest.

I don’t mind paying CGT, but there has to be a genuine sale attached. Otherwise, there’s no cash to pay the tax bill with!