Extension of lease in flat management company

Extension of lease in flat management company

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I act for a flat management company which owns the freehold interest in the property it manages. There are 54 flats and last year five of the leaseholders paid £5,000 each to extend their leases (by 90 years each I believe).

Am I correct in thinking that this is a part disposal for the company and therefore a capital gain has arisen?

As the leaseholders are the shareholders in the company is there an argument that this is a mutual trading company and therefore no corporation tax on the capital gain is payable?

Assuming that there is a taxable gain, presumably the premium paid by each leaseholder will need to be replaced with market value. Any idea how I would go about determining this?

The freehold is in the accounts at £32K (bought a number of years ago). I have read that ( as a rule of thumb) the value of the freehold would probably be somewhere between 15 and 30 times the annual ground rents - which would put the value in the region of £570K to £1.14m. So, assuming £570K would the base cost be calculated as follows (A/(A+B) :-

32,000 x MV

              MV+570,000

As the proceeds were greater than £20,000, I assume that the small part disposal rules are not appropriate? But going forward, if there was only one transaction in a year and assuming that the £5,000 referred to above respresents the market value of the lease extension, am I correct in thinking that the small part disposal rules will apply and that the proceeds of £5,000 will be deducted from the original cost of £32,000 on ultimate sale of the freehold?

Any help would be appreciated. 

Replies (3)

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Portia profile image
By Portia Nina Levin
25th Apr 2015 11:22

(No subject)

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By robvaughan
31st Mar 2015 09:28

Thank you for coming back to me.

Obviously I am interested in the "alternative argument" mentioned in your response as this will save the client tax. Does anyone have any further support for this opinion?

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Portia profile image
By Portia Nina Levin
25th Apr 2015 11:22

(No subject)

Thanks (0)