Defer capital gains tax on leasehold extension or surrender
Written by Ray Coman
In most cases a freeholder will not have any choice to meet a leaseholder’s request to extend property. Through collective enfranchisement leaseholders can oblige a freeholder to sell his or her asset. Provided the freeholder did not take active steps to advertise the disposal or part disposal, this type of disposal is treated for tax purposes as a compulsory purchase. Accordingly, it is possible to delay any gain through reinvestment in replacement property.
The replacement property cannot be the principal private residence (i.e. home) of the landowner, or will not be the home within six years of receiving consideration for the lease.
The replacement property must be purchased no earlier than one year and no later three years after the gain. In this context the gain is premium received on lease extension, or in the case of collective enfranchisement, disposal of the freehold.
Any gain not reinvested would be subject to tax and the base cost of the replacement property will be reduced by the amount of gain rolled over. Further information on this type of calculation is in the report on the capital gains tax treatment following damage or destruction to a property.
This form of roll over relief of compulsory purchase is enabled by Section 243 of Taxation of Chargeable Gains Act 1992. The HMRC interpretation of leasehold extension as a form of compulsory purchase is set out in Statement of Practice 13 (1993.)