I am a freeholder. The flat owner is going to pay me a premium to extend his lease. Am I going to pay any tax on that?
The answer to this is that ‘it depends.’
Assuming that there will be a capital gain on the disposal when the lease is granted then the answer is probably ‘yes’.
The exception may be a situation where a Notice is served under the legislation and you are able to ‘roll over’ the gain because you plan to reinvest in another qualifying asset (ie property) this suits owners of freeholds who act as investor.
If you own an individual freehold or happen to have a leasehold property attached to your freehold property you will receive a lease extension premium then these considerations are unlikely to apply and it is likely that you will have a capital gain to declare on the ‘disposal’ i.e. the sale of the lease to the tenant.
Different considerations apply if you are a freehold company (owned by the flat owners) and you are granting yourselves lease extensions.
Expert advice should be taken as to your tax status which is likely to depend on your own status – (for instance there may be certain exemptions or allowable expenditure that you can take advantage of). For further advice you will need to consult a professional practice with a tax department or an accountant or other tax advisor.
I was pleased to speak at the Landlord and Letting Show at the Barbican on 25th/26th February 2015, giving two talks on “What to look for when buying a leasehold property as an investor” and “How to Add Thousands of Pounds In Value to Your Flat… by buying the freehold or extending the lease.”
Both talks were well received and there was a good Q&A session after each. If any one would like to get in contact to discuss further any of the issues raised then please do email firstname.lastname@example.org or visit:
Mark Chick speaking and the Landlord and Letting Show
If a Section 42 Notice has been served, this notice will state an offer figure. This is very much the starting point in negotiations as to the price to be paid. You should take professional valuation advice on the likely ‘fair’ premium from a qualified surveyor.
You can always use a Lease Extension Calculator to determine whether the offer seems valid, however the best way to know would be to obtain professional advice.
Even if you are involved in an informal discussion that will lead the grant of a new lease, you should ask the tenant to pay your costs in obtaining valuation advice so that a figure can be offered to the tenant and/or put to the tenant in informal negotiations. As the statutory process requires that your costs are covered under Section 60 of the 1993 Act, it would not be unreasonable to ask the tenant to pay some or all of your legal and valuation costs.
If you are served with a Section 42 Notice or a Section 13 Notice, you should take legal advice immediately. If you fail to respond to the Notice of Claim or do not respond in the appropriate way, you are at risk of losing out.
Even if you are happy to deal with the leaseholder ‘informally’, you will need a solicitor to deal with the grant of the new lease to the tenant, or with the conveyancing of the freehold interest if you are disposing of it. This is not something you can do yourself.
If represented, the tenant is unlikely to want to make a payment to you in person as there can be legal difficulties in completing any lease in such a way were the counter party is not a solicitor.
In an extreme case it might be possible for one party to be represented and to draft a document for signature only by the other but this has a serious disadvantage that the unrepresented party is not able to receive legal advice on the nature or effect of the document and is at risk of losing out.