Lease Extension – Tax Implications?

Lease Extension – Tax Implications?

12:00 PM, 16th May 2022, About a month ago 3

Text Size

Hi everyone, In 1999 we purchased a one bedroomed leasehold flat. Several years later we extended the lease at some considerable cost.

We recently sold the flat and now have to calculate the CGT owing.

My question is the cost of extending the lease claimable as an allowable expense against CGT?

I can’t find where it is clear on this matter.

Many thanks

Malcolm

Editor’s Note:

From HMRC >> Click here

Grant of a long lease out of a freehold or long leasehold interest

To calculate the gain arising on the part disposal, any allowable expenditure (apart from the costs of disposal) is apportioned between the freehold reversion or superior leasehold interest retained and the lease granted. This is done by applying the fraction A ÷ (A + B) to the allowable expenditure, as for part disposals of other assets, but with one difference.

For the granting of a lease:

  • A is the premium or consideration received for the grant of the lease
  • B is the value of the interest retained which includes the value of the right to receive the rent due under the lease

Example 1

On 30 June 1988, Mr Jones bought the freehold of a property for £150,000. On 30 June 2019, he granted a 75-year lease of the property for a premium of £200,000. Rent of £5,000 a year was due under the lease. Mr Jones incurred legal fees of £3,000 on the grant of the lease.

The value of the interest retained is the freehold subject to the lease and at 30 June 2019 this was valued at £100,000.

Mr Jones’ allowable expenditure is:
£150,000 (cost of property) × A ÷ (A + B)
£150,000 × £200,000 ÷ (£200,000 + £100,000) = £100,000
The gain accruing to Mr Jones is then calculated as follows:
Premium received £200,000
Minus apportioned cost (as above) £100,000
Legal fees £3,000 £103,000
Chargeable gain £97,000


Comments

Malcolm View Profile

21:57 PM, 16th May 2022, About a month ago

Thank you for a detailed response.
Apologies for not making my question more clear.
A premium of £7,000 was charged to us as leaseholders, by the freeholder, for extension of the lease. My question relates to whether or not we as the lessees can claim the £7,000 as an expense against the gain made by us on our sale of the property, so as to reduce the Capital Gains charge we have to pay.
Regards, Malcolm

Ron H-W

9:14 AM, 17th May 2022, About a month ago

My immediate answer is, "Yes of course", though IANAL.
(The "Editor’s Note" does not seem directly relevant, because this is not a PART disposal.)

The expense or cost of an improvement which adds to the value (e.g. refurbishment, extension if it's a house, etc.) and is not claimable as a "revenue" expense MUST, surely, be valid for this.

When a group of lessees bought the freehold of their block, three did not "buy in", so the extra money had to come from somewhere.
I was one of the lessees, and was willing to cover the shortfall by myself having the right to the proceeds when these flats would eventually "buy in"; ALL the lessees agreed to this, and it cost me 3 x £11K.

A couple of years ago, some 12 years later, one of the three did buy in, and (as expected!) I ended up paying CGT on the gain (excess over the £11K.) More details are available if required.

Ron H-W

9:17 AM, 17th May 2022, About a month ago

I forgot to mention, you should also be able to claim your legal costs in connection with this matter, including Land Registry fees - and freeholder costs if you were required to cover those!

Leave Comments

In order to post comments you will need to Sign In or Sign Up for a FREE Membership

or

Don't have an account? Sign Up

Landlord Tax Planning Book Now