Capital Gains Tax for Ltd Company Lease Extensio

What tax is payable on long lease extension?

Didn't find your answer?

We have a limited company that owns the freehold of our building of flats and most leaseholders own a share of the company. Some opted not to invest.

A leaseholder that doesn't own a share is selling their flat and the buyer is paying a premium for a 999 lease extension. If the freeholder was an individual, this would usually be a capital gain and taxed accordingly. How does this work for a company? Is it a capital gain but taxed via corporation tax at 19%?

Thank you for your help.

Replies (14)

Please login or register to join the discussion.

avatar
By The Dullard
30th Mar 2022 15:28

Was it a collective enfranchisement?

Thanks (0)
Replying to The Dullard:
avatar
By Lee11_1989
30th Mar 2022 15:56

Initially, yes. But that was a few years ago and the flat currently being sold chose not to be part of the enfranchisement. The new buyer of the flat is opting to pay a premium for a 999 lease extension.

Thanks (0)
Replying to Lee11_1989:
avatar
By The Dullard
30th Mar 2022 16:41

Then, whilst the company is the legal owner, it is the participating leaseholders who are the beneficial owners and the company is just their nominee (a person acting on their behalf. The effect of the legislation is to create a constructive trust.

It is then the participating leaseholders who are truly making the disposal, and PPR may be available.

That being said, if the property has been shown in the accounts as a company asset, as so many accountants seem to do, it's not easy to unravel with HMRC.

Thanks (0)
avatar
By Paul Crowley
30th Mar 2022 16:05

Sounds to me as if the company has a tax matter to deal with
But it all depends on prior years transactions
Was all the money received attributed to share capital?
Were the prior lease extensions to members given away free?

Are the rents received being declared?

Thanks (0)
Replying to Paul Crowley:
paddle steamer
By DJKL
30th Mar 2022 16:17

Paul, we do not have these beasts up here (different conveyancing system) so please humour me, does this all sort of boil down similar to "mutual trading" re the tax position?

Thanks (0)
Replying to DJKL:
avatar
By Paul Crowley
30th Mar 2022 17:49

When the decision to enfranchise is made then the new company buys the freehold.
Any who do not join in get charges for ground rent which as I understand it should be declared for CT as the payer is not a member of the company
The investors all get a £1 share
Balance of money is a loan which then gets used to buy the long lease from the new property company

Those not joining in cause the problem
Eventually they will need to buy a long lease so that the property can be security for a mortgage
This mucks up the arithetic because there are say 20 properties but only say 18 investors

Not yet dealt with one directly, but one particular local property agent decided that all money in was share capital and that the investors would then get the long leases for free
No idea whether HMRC advised about any of it or of his intensions when one of the outsiders want to then buy a lease.

Thanks (1)
Replying to Paul Crowley:
avatar
By The Dullard
30th Mar 2022 20:03

That's not correct. The company is mere nominee acting "on behalf of" the participating leaseholders, who are the parties entitled to acquire the freehold. That's what the legislation says. Ask any member of ALEP.

The beneficial owners are the participating leaseholders; what they put in is their share of the purchase price and they are entitled to a share of the ground rents. Trying to "fudge" it and treat it as an asset of the company with half-arsed accounting just causes problems that don't need to be caused.

If you would propose to do it this way. Don't do one.

Thanks (1)
Replying to The Dullard:
avatar
By Paul Crowley
30th Mar 2022 20:38

Interesting
So what exactly would be the cost of the leases for the individual shareholders in the example of 18 participators for 20 properties?
Logically it cannot be the whole of the money put in as share capital as there are clearly 2 left overs

Thanks (0)
Replying to Paul Crowley:
avatar
By The Dullard
30th Mar 2022 21:30

There is no cost of shares. The company is a legal fiction; it is just constructive trustee for the participating leaseholders. The company has share capital of £18 all of which is unpaid.

The cost of any lease extension as well as the interest in the freehold reversionary interest is 1/18th of whatever was paid for the freehold.

When the leases are granted all the participating leaseholders have exactly what they had before; being:
- the superior interest over, and freehold reversion of, the leases over the 2 non-participating leases (X),
- a period of years (Y) over 1/18th of the property, and
- a 1/18th share of the superior interest over (Z), and the freehold reversion (being perpetuity - Y) of, the leases over the 18 participating flats.

The value of Y might change by a miniscule amount in consequence of the leases being granted, but it is still the same legal interest. X is changing from, say, 42 to, say, 999. When you add them together though you have X/20 + (perpetuity + Z)/18 both before and after. The two Y/18s cancel each other out.

You're trying to do logic based on accountancy, rather than applying the law and then basing your logic on mathematics.

I've seen situations where the leases for the participating leaseholders haven't been extended until years afterwards, giving rise to an apparent tax charge, when actually there isn't one.

There is a CGT disposal if the lease of a non-participating leaseholder is extended, but PPR relief will be available to the participating leaseholders who occupy their flats as their main residences.

Thanks (1)
Replying to The Dullard:
avatar
By Tax Dragon
31st Mar 2022 09:45

IANAL, IAIPNAPL, but do X, Y and Z exist in the way you describe? If a freehold could be divided up into 20 little pieces, then - isn't that what would happen? The owner of the leasehold could acquire the relevant 1/20th of the freehold and - bingo bongo - all these stupid arrangements such as underlie this thread would vanish.

I can see that positing X, Y and Z might be helpful (even if it's a fictional construct) to try to argue that PPR applies when a participating leaseholder extends that leasehold - or maybe to say there is no disposal at all in that circumstance, as they already hold what they are acquiring. It's not right, in my view, but at least you could make a case. But the X/Y/Z construct is the exact opposite of helpful in the case of the non-participating leaseholder, isn't it? PPR applies to Y, clearly, and (you might argue) Z to some extent. But it doesn't apply to X at all. And the disposal is of part of X.

Thanks (1)
Replying to Tax Dragon:
avatar
By The Dullard
31st Mar 2022 13:53

Commonhold interests are a real possibility, but they still aren't used much, and X, Y and Z don't exist in exactly the way I describe; I was using them to show what actually changes when leases are extended.

In the case of a building comprising units that are subject to leases, there are two interests: the freehold interest and the leasehold interest (multiplied by the number of units, obviously).

Each leasehold interest entitles the leaseholder to a proprietorial interest for a period of years (that interest is my Y). The freehold interest has two entitlements:
- to receive any ground rents under the leases (my X), and
- to the proprietorial interest on each unit after the period of years under each lease has finished (my Z).

In relation to the application of PPR for a person that holds both a leasehold interest (Y) and a share of the freehold interest (comprising entitlements X and Z), I refer you to the wording of TCGA 1992, s 222(1) and (5). The freehold interest over the whole building is still an interest in the dwelling which is used as the main residence. The fact that it also happens to be an interest in 19 other dwellings doesn't alter that.

And extending a lease to a non-participating shareholder is not a disposal of X, it's a part disposal of Z; the reversionary interest was perpetuity - 42 and now it's perpetuity - 999. The freeholders are no less entitled to receive the ground rents as a result of the lease extension though.

In relation to the extension of the leases for the participating leaseholders, my use of X, Y and Z was intended to show that they owned the same things, collectively, both before and after the extension; it's just that there proprietorial interest over a period of years is extended and when the freehold reverts is extended by the same amount, with their right to ground rents remaining the same (as a right), albeit that it possibly changes in value.

Holding the same thing, in totality, after an event that was held before has been held to not be a disposal at all in Sargaison v Roberts 45 TC 612; not a CGT case, but one that HMRC accepts applies for CGT purposes in a sale and leaseback situation (see CG70774), which ain't really all that different from the leaseholders acquiring the freehold and then extending their leases.

Thanks (0)
Replying to The Dullard:
avatar
By Tax Dragon
31st Mar 2022 16:08

There are some cases (you mention Sargaison v Robert; Jenkins v Brown/Warrington v Sterland & Ors is another) that I can't get my head round (IANAL, IAIPNAPL) but where the courts seem to have stood back, shrugged, and based the decision [as to whether there had been a disposal (and of what)] on what there was after compared to what there was before, ignoring how the person before them got from the one to the other (the staircase, as you put it).

But taking the stand-back-and-look-at-the-before-and-after approach here, in what sense has anybody disposed of an interest in the dwelling-house in which they live to the non-participating neighbour extending their leasehold of the flat upstairs/down the corridor/wherever?

I guess I'm asking - has your argument been properly tested (vis-à-vis the non-participators)?

Thanks (0)
Replying to Tax Dragon:
avatar
By The Dullard
01st Apr 2022 10:12

I'm not aware of any decisions on the matter. I did think it was explicitly stated in HMRC's manuals, but the paragraph following the bullets in CG64600 is the best I can find.

However, if I as a participating leaseholder in a collective enfranchisement acquired a 1/18th share in the freehold (under a right given to me in law because of my existing leasehold interest in my dwelling), then how is my 1/18th share in the freehold interest not an interest in my dwelling?

Thanks (1)
Replying to The Dullard:
avatar
By Tax Dragon
01st Apr 2022 10:59

I think you would agree that CG64600 does not really provide much illumination here. (It's a good page - and in general I think HMRC's CG Manual on OMR/PRR is excellent - but it doesn't answer our question.)

The Dullard wrote:

if I as a participating leaseholder in a collective enfranchisement acquired a 1/18th share in the freehold (under a right given to me in law because of my existing leasehold interest in my dwelling), then how is my 1/18th share in the freehold interest not an interest in my dwelling?

I know you said that it didn't matter that <5% of that freehold interest relates to your dwelling (or, rather, you said that it didn't matter that >95% of it related to communal areas and other people's dwellings) - but were you right? Restating the question from my previous post, has your interest in your dwelling lessened as a result of the disposal? Surely not. (What happens when your lease expires? Exactly what would have happened before, isn't it? You still have your 1/18th proprietorial interest in that unit.) Has the other leaseholder acquired an interest in your dwelling? Again, surely not.

[I do kind of get your point. And I'm willing to accept you might be right in law. I honestly have no idea whether you are or are not. I just so wish I could get my head round some of this property law stuff - at least enough to be able to comment better on the tax!]

Thanks (0)