Capital gains on lease extension by leaseholder-owned company


Written by Ray Coman


Author's note:  This webpage has received a high response rate.  It is probable that I won't be able to help you.  Please read the two questions below.  

Does a company own the freehold to a building in which you own one of the flats on a leasehold? (Yes)  Has the freehold company extended the lease?  (Yes)  If so, you probably have a tax liability.  There is nothing special I can do to reduce that tax liability.  If having read this statement, you are prepared to pay corporation tax for the company and income tax as the leaseholder on dividends I can assist.  Otherwise, I cannot assist. 


Capital gains on lease extensionCapital gains on lease extension through company owned by leaseholders.  Leaseholders who collectively own more than half the flats in a building can force a freeholder to sell.  A company is set up to acquire the freehold and each flat owner receives a company share in exchange.  If the leases are not extended to 999 years from the outset, there could be a substantial corporation tax liability on extension of leases.  The ways of avoiding capital gains on lease extension by tenant owned company are explained below.  The tax planning section outlines some considerations for the mitigation of tax where the issue arises.


The sale of the leasehold from one flat owner to the next would only give rise to capital gains tax if the flat is not the owner’s home.  However, the corporation tax issue arises for whichever leaseholder seeks to extend a lease.  The company could make the granting of a lease conditional on the leaseholder indemnifying the company for any tax which arises.  A single leaseholder would effectively bear the brunt of tax in that situation.


Freehold purchased via a trust


Capital gains tax on grant of long lease

Lease extension soon after company formation

Lease extension some years after company formation

Tax planning


Freehold purchased via a trust


In the situation that the freehold company has purchased the freehold on trust, there is no exposure to capital gains tax for the leaseholders.  Capital gains tax is based on beneficial rather than legal ownership.  Therefore, since the tenant is the beneficial owner of the freehold, no disposal has occurred for capital gains tax purpose when the lease is granted.


Furthermore, for Stamp Duty Land Tax purposes, it is the freehold company, who is the nominee, that is treated as purchasing the lease.  Provided the consideration is for a nominal amount, there should be no charge to Stamp Duty Land Tax.


While the structure seems duplicitous, it is a workaround to accommodate the situation in which flat owners are effectively just granting a lease on the property that they already own.  The nominee structure enables leaseholders with a share in a company that owns the freehold to enjoy the same tax exemption as other types of homeowner.  Purchase of the freehold allows those living in that building greater control over lease negotiations and ground rent.




If the company has been established as a commonhold, the flat-owners each own a share of the freehold and there is no leasehold.  In practice, commonhold is a rare form of organisation for flat-owners.  However, it avoids capital gains tax consequences of a freehold management company.


Capital gains tax on grant of long lease


When the flat owner wishes to get a lease extended, the value of the new lease is the consideration received by the company.  The company has effectively granted a long lease out of freehold.


The cost that can be deducted from proceeds in calculating the gain is as follows:


Original cost ×  premium paid/ premium paid plus value of the remainder


The value of the remainder includes the right to receive the rents and the discounted value of the reversionary interest of the property on the expiry of that lease.  Gross premium is used in the above formula, although costs of sale will be deducted from the overall gain.  Cost of sale typically include legal and valuation fees.  A surveyor is employed to value the reversionary interest of the lease.


Lease extension soon after company formation


The usual practice is for the leases to be extended to 999 years immediately after acquisition of the freehold by the company.  If that has occurred there the cost of the new lease would effectively be the same as the proceeds received by the company.


By reference to the capital gains tax equation in the section above, the reversionary interest in the lease is effectively nil, because the unexpired term of the lease is equal to the whole term of the lease.


The best practice is for a company to extend the lease as soon as possible after the freehold is purchased.  There is seldom any need to extend a lease which has centuries to expire.


Lease extension some years after company formation


However, if there has been a gap between the purchase of the freehold by the company and the granting of a lease, there could be a capital gains tax.  The reason is that a company is not eligible for PPR (Principal private residence relief.)


As the lease starts to expire so that premium for lease renewal increases, and the reversionary interest of the freeholder increases.  This is because the freeholder has less time to wait to take back possession of the property.  When a lease term has fallen below about 80 years, the lease value starts decreasing faster.  Therefore, the exposure of the company to corporation tax on the capital gain increases over time.  Moreover, if values are rising, so will the cost of renewing the lease.  This factor can also contribute towards a higher exposure of the company to tax on gain caused by lease extension.


The tax trap cannot be sidestepped by extending the lease at undervalue.  The tax regulation interprets that a dividend has been paid to the leaseholder for the amount by which the lease has been undervalued.  This will usually be undesirable because income tax rates tend to be lower than corporation tax rates.


A lease extension is likely to give rise to a gain that is then the entitlement of leaseholders to extract. The distribution of profits after tax will be treated as dividend in the hands of the shareholder and often liable to income tax.


Tax planning


If a new block of flats is acquiring its own freehold, the grant of a long 999-year lease should be carried out shortly after incorporation.


Alternatively, consider writing a trust as soon as the company is formed, so that the tenant is beneficial owner and the company is ‘seen-through.’


Instruct the surveyor to identify any justification for a revisionary interest value as low as possible.  Consider that there are no third parties since the property is not changing hands.  Any successive rises in the lease would be exempt from capital gains in the hands of the flat owner if the property is being used as a home.  The mere fact of a poorly conceived company could itself reduce the value of the lease reversion.  Any gain on subsequent disposal by the leaseholder could be exempt under the principal private residence rules.


The tax planning points are provided in the context of a situation in which the leaseholder cannot benefit from the PPR exemption that would otherwise be available.


An owner of a property which is not that person’s home, would be liable to capital gains tax in any case on disposal.  Typically, the property owner is a landlord.  The landlord’s taxable gains would be reduced on eventual disposal by the cost of any leaseholder extension.  The company could obtain an indemnity from the landlord to pay for tax on the lease extension.


Perhaps, there is a trust declaration in evidence but that with successive owners the whereabouts is not known to the existing leaseholders.  It is possible that as a bare trust is not liable to tax on capital gains was not registered with HMRC.


An implied Trust is not expressly created by the settlor but derives from actions. Any capital gain on proceeds distributed to shareholders would result in a potential gain for the individual rather than that of the company.  The tax benefit is as follows:


  • A company does not have an annual exemption, whereas an individual does;
  • A company is not eligible for principal private residence relief whereas an individual is; and
  • The combined corporation tax on gain and income tax on dividend paid out of net proceeds is referred to in tax jargon as the double tax charge.  Probably individual gains would be lower than the double tax charge.


Profits from a leasehold extension is the entitlement of shareholders.  The proceeds are distributable reserves of the company.  While Trust arrangements could be an effective tax planning mechanism, a change of company arrangement could be blocked by other shareholders especially if they are not being compensated for loss of dividend.  Disposal of a property right by one individual to another would generally be liable to capital gains tax.  The issue arises because it is not the home of the other leaseholders which is being extended.


#2 Ray Coman, FCCA 2023-09-23 17:13
By reference to historical document, you would determine the original value of the freehold and by reference to a professional valuer (i.e. surveyor) you would establish residual value and premium.
#1 Ravji Pindoria 2023-01-25 21:58
I have FH GR Block of flats, and have done 2 lease extensions , and unsure how to calculate and apportion my original cost (A) . Do I get a market value of FH of whole block after each extension, seems overkill. Also i had the block transfered over from my mother . Is this teh cost A= MV at time of trf ?

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