Extending a Lease to Oneself - Capital Gain Event?

Freeholder client grants extended lease to his own leasehold property

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Client purchased a leasehold flat as an investment property (he's never resided there) in 2010 with around 70 years' lease remaining. As part of that same 2010 transaction, he also purchased the absolute freehold for the ENTIRE BLOCK of flats (his own flat included) which is held on a separate land registry title. Both titles purchased and held in client's sole name throughout.

Client has recently extended the 56 remaining years on his leasehold flat to a 999 year lease (in readiness for selling it).

Am I correct in thinking that the disposal of the old lease and the granting of the new lease are non-CGT events because:

(i) as a leaseholder of the flat, he's disposed of something he owned (a 56 year time slice of the freehold) to himself? and

(ii) as the freeholder, he's granted an extended lease on something he owned (the freehold) to himself?

I'm doubting my own rationale, above - am I being too simplistic / optimistic in thinking that neither transaction is a CGT event? 

Incidentally, the reversion values of the remaining flats' leases would otherwise create a sizeable CGT libability using the Cost × A ÷ (A + B) long-lease formula.

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paddle steamer
By DJKL
13th Jun 2024 17:25

As far as I can work out (and remember your system of land ownership confuses me) he had, it appears , initially two assets.

He has passed some value from one asset to the other asset but that surely cannot be a disposal????

Therefore the issue is what is the cost of the leasehold flat when he sells it?

If they are two assets the base cost of the leasehold flat got increased, the value of the freehold decreased, if they are a A/(A+B) disposal, all one asset, then it is apportionment of the total costs acquiring leasehold and freehold on first sale.

Great question.

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Replying to DJKL:
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By I'msorryIhaven'taclue
13th Jun 2024 18:48

Hi DJKL, ca va? I/m v. grateful for your thoughts on this matter.

DJKL wrote:

....he had, it appears , initially two assets.

>

Absolutely - two separate and distinct land registry entries and two separate reference numbers down here at Sassenach Land Registry. The first is for a L/H flat with a 99 year lease with circa 55 years unexpired; the second for the F/H of a block of 4 flats (one of which, of course, belongs to our protagonist client). The second of these assets, the F/H title, was acquired as part and parcel of the 2010 purchase for a peppercorn sum.

DJKL wrote:

He has passed some value from one asset to the other asset but that surely cannot be a disposal????

I guess that's the thrust of my question - how on earth can you trigger a gain by gifting something (in this case an extended lease) to yourself? Or, for that matter, to your spouse! (although our protagonist is a bachelor boy, so not an issue in our particular case).

DJKL wrote:

Therefore the issue is what is the cost of the leasehold flat when he sells it?

If they are two assets the base cost of the leasehold flat got increased, the value of the freehold decreased, if they are a A/(A+B) disposal, all one asset, then it is apportionment of the total costs acquiring leasehold and freehold on first sale.

Good point - but perhaps a bridge too far at this stage of proceedings. I want to say the former, with a transfer value of nil because (and I've been longing to paraphrase a sentence from one of the Revenues's inspectors that stuck with me): "I've seen no evidence to the contrary". The latter, the cost x A/(A+B) disposal, produces rather inequitable outcomes and I suppose could apply to two separate and distinct assets - but, hopefully the workaround of no CGT event would avoid going down that rabbit-hole.

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By More unearned luck
13th Jun 2024 17:52

If DK

"Client has recently extended the 56 remaining years on his leasehold flat to a 999 year lease (in readiness for selling it)."

Are you sure of your facts? My understanding IANAL, of English law is that the same person cannot be both landlord and tenant. On that basis: 1) when your client bought the freehold, his flat became freehold. 2) He cannot grant a lease to himself.

Perhaps the facts are that his lawyers have merely drafted a 999 lease agreement in preparation of a proposed grant of a lease to a purchaser when one has been found.

On the basis he will make a part disposal of his freehold interest. The cost of that might need to be augmented by the cost of his flat.

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Replying to More unearned luck:
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By I'msorryIhaven'taclue
13th Jun 2024 19:39

More unearned luck wrote:

If DK

Are you sure of your facts? My understanding IANAL, of English law is that the same person cannot be both landlord and tenant. On that basis: 1) when your client bought the freehold, his flat became freehold. 2) He cannot grant a lease to himself.

Hmmm... thank you, you make some good points. I guess this is what Aweb's all about!

So, when he bought the flat in 2010 he actually bought two titles: the first a L/H flat with circa 70 years' (of 99 yrs) unexpired lease; the second, a F/H title for the entire block (of 4) flats, each with the same 70 years' unexpired lease. He's recently (2024) extended his own (but not the others') lease to 999 years.

More unearned luck wrote:

Perhaps the facts are that his lawyers have merely drafted a 999 lease agreement in preparation of a proposed grant of a lease to a purchaser when one has been found.

Perhaps... and that would indeed torpedo matters. I'm awaiting the paperwork in the hope that his lawyers have been savvy enough to grant the extended lease to our client's flat ahead of the sale; and not structured it so that the 999 year lease is granted to the purchaser. That would indeed put the cat amongst the pigeons!

More unearned luck wrote:

On the basis he will make a part disposal of his freehold interest. The cost of that might need to be augmented by the cost of his flat.

Let's take matters at face value by supposing that the part disposal of our protagonist's F/H interest has been made in advance of any sale of his L/H flat, we're back to my original muse of whether he (the freeholder client) triggers a capital gain by granting himself (with his L/H flat owner hat on) an extended lease. It's almost too good a workaround to be true!

Without going too deeply into the realms of fantasy, suppose I own two valuable paintings, one with a v. expensive frame. I gift the valuable frame from the painting I plan to retain to the painting I plan to sell. Is there a CG event upon transfer of the frames? (I appreciate what you're saying: what if my idiot solicitor structures the sale of said painting so that the valuable frame is sold as a separate lot). Not the best of analogies, but where's the capital gain event when the frames are transferred? Where's the capital gains event when I transfer transfer some value from my F/H interest to my L/H interest? See what I'm getting at?

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Replying to I'msorryIhaven'taclue:
paddle steamer
By DJKL
13th Jun 2024 19:56

Try it with two blocks of 18ct gold each 200g.

You put them both in a container, heat it then pour the gold into one container of 250g and another of 150g.

No issue until you sell when base cost of what you sell needs determined, this is made easier than reality as at least each is 18ct gold, the same.

Trickier when disparate assets (albeit related) joined to calculate what part of initial value of freehold transfers with bigger size of leasehold (longer lease))

p.s. maybe better with a Lada and a barrel of petrol, you fill the tank before selling the Lada with 1/5th say of the fuel, calculate cost of item sold.

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Replying to I'msorryIhaven'taclue:
paddle steamer
By DJKL
13th Jun 2024 20:05

I think there is no CGT event, just movement of attributable cost between assets that is only on point IF/WHEN a later sale of one or other occurs.

p.s. what if you hold 100 shares and company decides to spin out a division into a newco and you end up with 70 shares in oldco and 190 in newco, what do you do, you apportion original cost.

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Replying to DJKL:
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By I'msorryIhaven'taclue
14th Jun 2024 06:49

DJKL wrote:

I think there is no CGT event, just movement of attributable cost between assets that is only on point IF/WHEN a later sale of one or other occurs.

So no CGT event for the lease extension; the L/H flat (with its spanking new 999 year lease) will indeed be sold shortly; the F/H title (for all 4 flats in the block) will be retained by our client for many years.

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Replying to I'msorryIhaven'taclue:
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By Tax Dragon
14th Jun 2024 07:00

Let me ask you what you think would happen if he still held the flat and the freehold when the lease expired. Would he own anything different after to what he owned before?

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Replying to Tax Dragon:
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By I'msorryIhaven'taclue
14th Jun 2024 07:32

Good Morning Earlybird, and thanks for your earlier responses below. I'm working my way down.

I take your point, and I guess that would be clearer-cut were this a L/H single dwelling house with a single F/H title. It's the slicing and dicing of the F/H that complicates matters. I'm assuming - and you may disagree - that granting a 999 year lease is tantamount to reducing the reversion value of the F/H (or one quarter of the F/H, given there are 4 flats) to nil. In years to come client will extend all three leases on the other flats and effectively reduce the value of the entire F/H to nil.

Notwithstanding the issues others have raised about whether a freeholder is able to grant himself an extended lease, evidently that's what our client's solicitor has done. Would you agree there is no capital gain event, or are you harbouring doubts?

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Replying to I'msorryIhaven'taclue:
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By Tax Dragon
14th Jun 2024 07:39

Good morning.

There's no CGT event.

There's no transaction.

Irrespective of whether there is one asset or two (I vote one), you cannot transact with yourself. You say "evidently that's what our client's solicitor has done". I say there's nothing evident about it. What your client may come to sell may be a 999 year leasehold interest. But that interest does not exist prior to the sale. [Subject to a Lady Ingram style workaround. But remember Lady Ingram made no (CGT) disposal prior to the gift.]

Ianal.

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Replying to Tax Dragon:
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By I'msorryIhaven'taclue
14th Jun 2024 09:50

Thanks TD, I'll settle for no CGT event.

I'll have to cross the one asset or two when the flat's sold. Client informs me there was a separate peppercorn payment for the F/H (of £10) but no paperwork to evidence that so far; and £199,990 for the L/H flat (which all sounds rather convenient, given the flat will be sold and the F/H retained by client).

Umm "evidently what the client's solicitor has done" as I have a copy of the solicitors' bill for a "Deed of variation". Too early for it to have turned up at the Land Registry yet.

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Replying to I'msorryIhaven'taclue:
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By Tax Dragon
14th Jun 2024 10:34

I'msorryIhaven'taclue wrote:

Umm "evidently what the client's solicitor has done" as I have a copy of the solicitors' bill for a "Deed of variation".

Be interested in the purchaser's solicitor's take on that.

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Replying to I'msorryIhaven'taclue:
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By kim.shaw-and-co.com
15th Jun 2024 21:17

I'msorryIhaven'taclue wrote:

Client informs me there was a separate peppercorn payment for the F/H (of £10) but no paperwork to evidence that so far;

Just look at a LR search on the freehold Title. The price paid is typically stated there where consideration passes if the apportionment has been properly reflected in the Transfer and subsequent registration of interests.

Since the F/H and L/H must be registered under separate Titles it's only in cases where no apportionment of consideration was made between separate interests on acquisition you can end up having difficulty attributing the price paid on registration to each separately.

Even if the Completion Statement has been mislaid and is beyond the retention period for the solicitors who acted in the purchase, the Registration itself often carries evidence of the price paid for a registered interest in land and buildings.

Of course, sometimes the conveyancing solicitors are sloppy (or incompetent) and don't carry over relevant information to separate registrations. In such cases, your client has a retention obligation beyond the usual retention period to support a deduction for costs and it is incumbent on him to have kept proper records.

If he hasn't then it's a case of 'tough luck' - the next step in a D1 would be to ask a valuer to prepare a report apportioning total consideration paid between interests to be retained and disposed of, as they would have been at the time of acquisition. Which would cost into the 4 figures ...

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Replying to kim.shaw-and-co.com:
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By I'msorryIhaven'taclue
16th Jun 2024 11:18

Thanks KS... I've skipped down to your (earlier) 20.56 post of yesterday regarding this matter (which, confusingly, appears further DOWN this thread).

kim.shaw-and-co.com wrote:

I'msorryIhaven'taclue wrote:

Client informs me there was a separate peppercorn payment for the F/H (of £10) but no paperwork to evidence that so far;

Just look at a LR search on the freehold Title. The price paid is typically stated there where consideration passes if the apportionment has been properly reflected in the Transfer and subsequent registration of interests.

Since the F/H and L/H must be registered under separate Titles it's only in cases where no apportionment of consideration was made between separate interests on acquisition you can end up having difficulty attributing the price paid on registration to each separately.

Even if the Completion Statement has been mislaid and is beyond the retention period for the solicitors who acted in the purchase, the Registration itself often carries evidence of the price paid for a registered interest in land and buildings.

Of course, sometimes the conveyancing solicitors are sloppy (or incompetent) and don't carry over relevant information to separate registrations. In such cases, your client has a retention obligation beyond the usual retention period to support a deduction for costs and it is incumbent on him to have kept proper records.

If he hasn't then it's a case of 'tough luck' - the next step in a D1 would be to ask a valuer to prepare a report apportioning total consideration paid between interests to be retained and disposed of, as they would have been at the time of acquisition. Which would cost into the 4 figures ...

Land Registration documents record the 2010 transaction considerations as £200k L/H & £0 F/H (they record £0 for any consideration of less than £100). FWIW the 2010 completion staement lumps the F/H & L/H together @ £200k, with no attempt at apportionment.

I've skipped down to your earlier post of 20.56 yesterday, LOWER in this thread; broadly the D1 option looks great (@£5 of "B" value; provided of course the Revenue accept £2ook / £10 peppercorn as the de facto considerations). That's why, rightly or wrongly, I was contemplating the alternative of HMRC regarding the purchase(s) as a composite acquisition, and how one way or another they (HMRC) might wish to reapportion the costs to what they consider reasonable (thereby increasing the value of "B").

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Replying to I'msorryIhaven'taclue:
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By kim.shaw-and-co.com
16th Jun 2024 14:31

I'msorryIhaven'taclue wrote:

FWIW the 2010 completion staement lumps the F/H & L/H together @ £200k, with no attempt at apportionment.

I've skipped down to your earlier post of 20.56 yesterday, LOWER in this thread; broadly the D1 option looks great (@£5 of "B" value; provided of course the Revenue accept £2ook / £10 peppercorn as the de facto considerations). That's why, rightly or wrongly, I was contemplating the alternative of HMRC regarding the purchase(s) as a composite acquisition, and how one way or another they (HMRC) might wish to reapportion the costs to what they consider reasonable (thereby increasing the value of "B").

Usual story then ... solicitors haven't provided evidence of the original apportionment of consideration and everything allocated to the leasehold in the Title. Client's unsubstantiated recollection that £10 attributed to the freehold.

As regards D1, there's nothing credible to go on - you may as well start with a blank sheet of paper.... or make a comprehensive white space disclosure attributing the entire acquisition cost to the lease disposed of in the absence of any material value attaching to the freehold if the client thinks that is correct. Warning in writing to client that HMRC may disagree leading to further tax and interest due.

As regards F/H value on acquisition a plus is the lack of ground rents. Would support a 'nil' valuation. The absence of express obligations is a minus. You would have to backtrack on potential 'spot' value arising from lease extensions, however their length at that time would be relevant. That's why you need a professional valuer to express an opinion of MV on original acquisition in the absence of evidenced apportionment agreed with the original Seller(s) of both interests.

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Replying to I'msorryIhaven'taclue:
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By JB101
14th Jun 2024 10:59

" I guess this is what Aweb's all about!"

No - It's all about IT consultants getting cross when they can't get an answer to how they can earn £1m per year, pay only 50p income tax and hold their children in an SPV to minimise CGT charges when they leave home (also held in two more SPVs)!

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Replying to More unearned luck:
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By Bobbo
13th Jun 2024 20:10

More unearned luck wrote:

Are you sure of your facts? My understanding IANAL, of English law is that the same person cannot be both landlord and tenant. On that basis: 1) when your client bought the freehold, his flat became freehold. 2) He cannot grant a lease to himself.

I've heard similar previously. The paperwork may not have been done but if one person owned both the freehold and a leasehold previously granted out of that freehold, it may be that legally the lease fell away?

I daresay the client hasn't been paying themselves ground rent and declaring it as income?

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By I'msorryIhaven'taclue
14th Jun 2024 07:17

Bobbo wrote:

I've heard similar previously. The paperwork may not have been done but if one person owned both the freehold and a leasehold previously granted out of that freehold, it may be that legally the lease fell away?

I can see how that would apply for a house, where the L/H property is held under one property register title and the F/H for that house is held under another property register title.

But in this case there are 4 separate L/H property titles (one for each flat in the block) and then a single F/H property title. Client owns one L/H flat and the F/H on the block. How in practice would you "merge" a L/H title with one quarter of a F/H title?

(And before you say A/A+B I guess we return to the original question of whether a freeholder extending his own lease is a CG event at all.)

I'm weak-suited on the legals here, but the fact that the client's solicitors have processed an extended 999 year lease on his L/H flat, granted from his F/H for the block of 4 flats, indicates to me that in this particular circumstance the F/H & L/H never "merged". (I may be wrong - I'm doubting my own rationale).

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By Tax Dragon
13th Jun 2024 20:57

I'msorryIhaven'taclue wrote:

I'm awaiting the paperwork in the hope that his lawyers have been savvy enough to grant the extended lease to our client's flat ahead of the sale; and not structured it so that the 999 year lease is granted to the purchaser. That would indeed put the cat amongst the pigeons!

Explain. What difference does it make?

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By I'msorryIhaven'taclue
14th Jun 2024 07:40

I'm hoping the former does not trigger a gain, as the client is gifting himself an extended lease from something he already owns (the F/H). I guess that's the main thrust of my OP.

The latter would trigger an A/A+B gain on the F/H.

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Replying to I'msorryIhaven'taclue:
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By Tax Dragon
15th Jun 2024 14:21

To follow up on this part of the thread... if B is small, compared with A, my maths training tells me that (1-A/(A+B)) is small compared with 1.

While I have enjoyed exploring topics none of us is qualified to advise about, my initial question about what difference it all makes hasn't really been answered - the difference in terms of tax actually payable on the sale/grant is likely insignificant.

(OP's original concern may have been that the base cost of the flat would not come into the A/A+B equation. If the thread did not correct that misunderstanding a long time ago, maybe OP should read it again.)

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By kim.shaw-and-co.com
15th Jun 2024 14:49

Tax Dragon wrote:

To follow up on this part of the thread... if B is small, compared with A, my maths training tells me that (1-A/(A+B)) is small compared with 1.

I think the worry is that B may not be especially small compared with A, because of the duration of the other leases out of the freehold that have not (yet) been extended.

For an apportionment to be carried out it would be necessary to obtain a valuation of the residual superior interest after grant of a single 999 year lease over one of the flats. The valuer would no doubt take lease length of the remaining leases into account in that valuation.

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Replying to kim.shaw-and-co.com:
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By Tax Dragon
15th Jun 2024 14:58

Maybe I misunderstood some of your other comments.

But at worst this seems to be a matter of timing, if there's an offer to extend the other leases (presumably at a gain for your client).

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By Tax Dragon
15th Jun 2024 17:10

Sorry - by "your" I meant "OP's". Didn't notice who I was responding to.

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By I'msorryIhaven'taclue
15th Jun 2024 19:24

Client plans to sit on the leases, because he believes they'll increase in value as the leases shorten. The longer his leaseholders leave it, the more it will cost them.

FWIT I disagree with him, as IMHO the new Leasehold and Freehold Reform Bill 2024 will likely favour leaseholders over landlords. But hey, what do I know!

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By I'msorryIhaven'taclue
15th Jun 2024 19:19

kim.shaw-and-co.com wrote:

I think the worry is that B may not be especially small compared with A, because of the duration of the other leases out of the freehold that have not (yet) been extended.

Spot on, KS - increasing B in the part-disposal equation does indeed increase the CG liability.

kim.shaw-and-co.com wrote:

For an apportionment to be carried out it would be necessary to obtain a valuation of the residual superior interest after grant of a single 999 year lease over one of the flats. The valuer would no doubt take lease length of the remaining leases into account in that valuation.

I've been using a ball-park valuation tool at https://www.lease-advice.org/calculator/

I'm leaning towards SP D1, given the peppercorn F/H purchase (in 2010). Currently pondering how that would sit alongside composite acquisition – TCGA92/S52(4) at https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg12740

Number crunching: worst case scenario, even if HMRC were to "insist" on apportionment of the L/H purchase price to uplift the peppercorn F/H purchase price then D1 would still produce a lower gain than A/(A-B). I might sleep on that.

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Replying to I'msorryIhaven'taclue:
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By kim.shaw-and-co.com
15th Jun 2024 20:56

I'msorryIhaven'taclue wrote:

I've been using a ball-park valuation tool at https://www.lease-advice.org/calculator/

I'm leaning towards SP D1, given the peppercorn F/H purchase (in 2010). Currently pondering how that would sit alongside composite acquisition – TCGA92/S52(4) at https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg12740

Number crunching: worst case scenario, even if HMRC were to "insist" on apportionment of the L/H purchase price to uplift the peppercorn F/H purchase price then D1 would still produce a lower gain than A/(A-B). I might sleep on that.

The composite acquisition issue is a non-issue, because the interests merge post-acquisition of the respective parts into a single holding. It is from that single (merged) holding part-disposals are then capable of being made.

As regards A & B in A/A+B, the ratio of original acquisition cost is irrelevant because A & B are determined with reference to MV of the disposal out of that plus the value of what remains (effectively MV of remaining freehold interest excluding the effect of the 999-year lease). So the higher the value of what remains, the lower the allowable base cost of the 999-year lease.

Re: D1, the effect depends on the stated original purchase price of the freehold (if any) and whether the original apportionment of consideration between the leasehold acquisition and the freehold acquisition was reasonable at that time.

Where originally acquired from an unconnected 3rd party, HMRC are unlikely to challenge use of the price paid for the leasehold out of the total price paid for both interests as an appropriate deduction from proceeds received for the proposed 999-yr grant.

What is likely to remain of the allowable base cost for future disposals may well be trivial. So the substantial effect is an acceleration of relief, because the value of the "flat" as a % of the total acquisition costs is likely to be a much higher % of those total costs (for which immediate relief is claimed) than apportioning base cost using current 'sales value' ratios of interests retained and disposed of 'today'.

I think @FactChecker signalled D1 was likely to be optimal in the circumstances a few posts back. The reasoning (notwithstanding any question of merged interests) is hopefully now becoming clear ? It flows from the ratio of price paid for each of the respective interests, and the likely dominance of the price paid for the original lease (pre-extension) out of the total price paid.

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By I'msorryIhaven'taclue
16th Jun 2024 10:38

kim.shaw-and-co.com wrote:

The composite acquisition issue is a non-issue, because the interests merge post-acquisition of the respective parts into a single holding. It is from that single (merged) holding part-disposals are then capable of being made.

Thank you, DS. I'd mused on composite acquisition as I'd seen it as the other side of the coin, so to speak, of a D1 election. You've covered that D1 matter in more detail in your later post of 21.17 (which, confusingly, is higher up in this thread).

The bones of the acquisition are that I have the entire £200,000 2010 purchase price allocated to the L/H, both at Land Registry and on completion staement. The 2010 peppercorn consideration for the F/H (covering all 4 flats - which client states amounted to £10) is recorded as £0 at the Land Registry (who, as you're no doubt aware, record £0 for any amount under £100) and does not feature on the 2010 completion statement as a separate item. In short, no breakdown within the 2010 completion statement; the entire £200k is attributed to "L/H & F/H" of the property, with no itemisation / apportionment.

kim.shaw-and-co.com wrote:

As regards A & B in A/A+B, the ratio of original acquisition cost is irrelevant because A & B are determined with reference to MV of the disposal out of that plus the value of what remains (effectively MV of remaining freehold interest excluding the effect of the 999-year lease). So the higher the value of what remains, the lower the allowable base cost of the 999-year lease.

I hear what you say - I'd figured if we're going the D1 route then the A/A+B part-disposal calc would have a v. low B (what remains) figure, thus maximising the base cost of the disposal.

kim.shaw-and-co.com wrote:

Re: D1, the effect depends on the stated original purchase price of the freehold (if any) and whether the original apportionment of consideration between the leasehold acquisition and the freehold acquisition was reasonable at that time.

Ahha, I think you've hit the nail on the head. If, for D1 purposes, you rely upon the 2010 completion statement you have something akin to a composite purchase. (Conversely, if you rely upon the Land Registry figures you have £200k L/H & peppercorn <£100 F/H). Then, separately, you have the issue of whether the peppercorn amount attributed to the F/H was reasonable (at that time).

kim.shaw-and-co.com wrote:

Where originally acquired from an unconnected 3rd party, HMRC are unlikely to challenge use of the price paid for the leasehold out of the total price paid for both interests as an appropriate deduction from proceeds received for the proposed 999-yr grant.

That's good to know (and yes, the 2010 acquisition was indeed from an unconnected third party). I suppose the other side of that coin ought (logically?) to be that HMRC would besimilarly unlikely to challenge use of the price paid for the freehold out of the total price paid for both interests... (I have in mind for D1 purposes).

kim.shaw-and-co.com wrote:

What is likely to remain of the allowable base cost for future disposals may well be trivial. So the substantial effect is an acceleration of relief, because the value of the "flat" as a % of the total acquisition costs is likely to be a much higher % of those total costs (for which immediate relief is claimed) than apportioning base cost using current 'sales value' ratios of interests retained and disposed of 'today'.

I think @FactChecker signalled D1 was likely to be optimal in the circumstances a few posts back. The reasoning (notwithstanding any question of merged interests) is hopefully now becoming clear ? It flows from the ratio of price paid for each of the respective interests, and the likely dominance of the price paid for the original lease (pre-extension) out of the total price paid.

Fully appreciated now, and thank you FactChecker for flagging that early doors. KS, I'm going to track back to your (later) 21.17 post (higher up the thread) regarding D!. As things stand, we have a £5 figure for B notwithstanding that HMRC might wish to regard the 2010 purchase as a composite acquisition and, if so, might consider £200,000 / £10 to be an unreasonable apportionment. (I'm assuming that if, conversely, HMRC accept that £200k / £10k were the de facto considerations at arms-length then they'd be unlikely to argue those "valuations").

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By I'msorryIhaven'taclue
15th Jun 2024 19:05

Hi TD, it was the A/A+B equation for the part-disposal of the F/H that originally had me worried, based on my misconception at the time that the grant of the lease to the purchaser might be made now, in 2024. Thanks to you guys, I get it now about the L/H & F/H merging way-back-when in 2010.

Shouldn't that be (1 x A/(A+B)) not (1-A/(A+B)) - always assuming '1' is the base cost ? My algebra's shaky, but what I found is that with higher values for B (obtained, as a ball-park figure from https://www.lease-advice.org/calculator/ ) I was churning out higher chargeable gain outcomes. It wouldn't much matter with a peppercorn base cost, but quite a difference with the L/H base cost @ £200k ish and a high B figure.

I'm tempted by SP D1.

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By kim.shaw-and-co.com
13th Jun 2024 22:01

Technically, the leasehold interest merges with the freehold when both are acquired/held. I think that should answer your question ?

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By Tax Dragon
14th Jun 2024 06:00

If that's right (and it's what we're told as tax trainees) then technically technically that had happened before OP's client bought the property, the flat and the freehold being acquired in a single transaction, which I took to mean from a single seller. [And which, btw, makes the base cost very easy to work out - how much was paid?]

The opening "if" there is because we had a flat-owning client [third parties owning the other flats in the building] buy the freehold reversion of the building. The lawyers advised that she could if she wanted to merge the interests. It wasn't automatic.

Blew my non-legal mind. Property law does not fit in my head.

But I would have thought, what with there being a single transaction and all, that here there was no doubt - what was bought was a single asset. The act of buying the freehold and leasehold together merged these interests. If the previous owner had not already done so. If they had a choice about that (as the lawyers in our case suggested).

Caveat: that thinking may have been influenced by, but may misrepresent, HMRC's comments under "Single acquisition of land" in CG7180o".

But I go back to my first comment: does it actually matter? I can't get myself inside OP's head on this one.

PS: there are lawyers lurking here too. In OP's shoes, I think I would be following their lead. What do they say?

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By Tax Dragon
14th Jun 2024 06:22

Sorry OP did explain the difference, but obfuscated by the transacting-with-oneself idea (which goes against common sense and Lady Ingram and I don't think fits into the advice from the lawyer on our case).

OP wants to use all of the base cost and not use A/A+B because B is more than negligible. [I suspect the previous owner lived in the flat and was happy to have all their proceeds allocated to the flat. Maybe OP's client should have taken tax advice when buying, not just when selling?]

If SP D1 doesn't apply, and maybe it doesn't, said client is left with the consequences of that earlier advice gap. Or maybe see if the Lady I workaround of using nominees changes nothing - doubt it though, unless it enables D1 [if not already enabled].

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By Tax Dragon
14th Jun 2024 07:33

Autocorrect changed "anything" to "nothing" in that closing sentence.

I love Autocorrect.

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By I'msorryIhaven'taclue
14th Jun 2024 11:11

Tax Dragon wrote:

The opening "if" there is because we had a flat-owning client [third parties owning the other flats in the building] buy the freehold reversion of the building. The lawyers advised that she could if she wanted to merge the interests. It wasn't automatic.

Ahha, default rule (they merge) followed by exception. That's interesting. I wonder where another exception might, out of practicality, arise where (as in our case) the Freehold covers a number of Leasehold properties?

Now it might be that you could apply to the Land Registry to divide up the freehold (ie choose to merge the interests). An alternative (to dividing the F/H) would be to grant a 999 year lease, which effectively reduces the reversion value of that F/H (or one-quarter of it in our case) to nil. Meanwhile, a flat with a 999 year lease is as good as freehold. Just thinking aloud - I can see how granting a 999 year lease achieves the same end as divvying up the freehold, and why your client might elect to keep the F/H intact and unmerged.

Tax Dragon wrote:

But I would have thought, what with there being a single transaction and all, that here there was no doubt - what was bought was a single asset. The act of buying the freehold and leasehold together merged these interests. If the previous owner had not already done so. If they had a choice about that (as the lawyers in our case suggested).

Thank you, I hear what you say that it's looking like one transaction and a single asset for CGT purposes. FWIW, the Land Registry displays a L/H sale to our client in 2010; with a purchase of the F/H (of all 4 flats) on the very same day. I just cannot get my head round the practicalities of merging a multi-property F/H with a single L/H asset.

Tax Dragon wrote:

Caveat: that thinking may have been influenced by, but may misrepresent, HMRC's comments under "Single acquisition of land" in CG7180o".

So given we've no"evidence which shows that more than one asset was acquired" then the "land" ("with or without its buildings") is a single asset.

However, under the same CG71800 "Blocks of Properties and Flat[s]" it states "However, if the owner wishes to treat each property as a single asset, no objection should be raised". I wonder whether, in that context, "each property" might be interpreted to mean (i) the individual L/H of one unit (the flat) and (ii) the overall F/H of the block?

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By kim.shaw-and-co.com
15th Jun 2024 02:29

I&#039;msorryIhaven&#039;taclue wrote:

Now it might be that you could apply to the Land Registry to divide up the freehold (ie choose to merge the interests).

A lot of things are possible in theory but can have other legal consequences. Flying freeholds for example create all sorts of problems and can be unmortgagable. It's one of the main reasons freeholds are usually based on the footprint of a building at the very least and extend to cover all buildings above which become subject to one or more leases over parts of it.

If you think about an option to tax covering everything on a piece of land that's probably the best way to think about how freeholds are typically structured where multi-storey buildings are in point (not entirely for the same reasons - a land lawyer is best placed to explain !) . That is not to say lawyers have not carved up freehold interests differently in practice in some cases. You therefore have to look at the actual freehold title plan and leases (plans and detail of extent) to understand what has happened.

The proliferation of investment portfolios in ground rents is a scourge which led to a lot of makeshift arrangements over freehold interests. Developers who used to vest freeholds in a NFP management company jumped on the bandwagon.

Small conversions are some of the worst in practice. Freeholds were often retained by the person converting and then sold for a profit either to one of the leaseholders (often the last to buy), a group of them or an investor depending on ground rent yields. Where there were management obligations attached to the freehold interest (e.g. roof of a block of flats) ownership actually matters. It's not just about ground rents !

Administering ownership of a freehold through a Partnership of leaseholders is a major headache for obvious reasons, so you often see companies limited by guarantee or a single individual/nominee as freeholder - in theory for responsibility and stability purposes.

If you end up with one leaseholder owning the freehold and one of the leases originally carved out of it, then if they don't interpose a nominee it leaves them unable to transact between freeholder and lessee in relation to the lease acquired along with the (transparent) responsibilities of freeholder to accompany their rights. It also raises questions about mutual obligations as lessee where others are affected financially in the same building. Basically a potential legal and administrative mess.

In OP's case there will almost inevitably end up being a grant of a new lease in order to dispose of a leasehold interest under different terms. The original lease will have merged with the freehold when originally acquired for all practical purposes.

Freeholds are best held through a nominee if there is no management company and the intention is to preserve a lease as a separate asset. It gives a legal counterparty with whom to enter covenants etc. even if equitable interests in a lease and freehold are owned by the same person and allows assignment, covenants etc. to be made that are intended to pass to the Buyer (of the leasehold interest).

HMRC are (perhaps understandably) not terribly clear about whether nominee arrangements are looked through for s43 purposes in cases where equitable interests in a freehold and lease granted out of it become the same.

Suffice to say if queried you may either have an uphill battle getting them to accept that there is no merging of interests in relation to the leased property upon acquisition of a beneficial interest in the freehold of the building out of which the lease was carved, or else have the opposite battle if you used a nominee but maintained there were not separate interests and a different officer looked at it.

The other leaseholders in this example appear to have no legal or equitable interest in the freehold - it may be the freehold of a building out of which multiple leases were granted (including OP's client's lease) especially if there are flats in point. There are often residual common parts of the building which remain under ownership of the freeholder and which would merge with the (now freehold) dwelling.

Once you think about it that way the merging of a lease with a freehold is not so difficult to visualize. A freehold always preceeds a lease. Therefore originally there will have been no leases granted to leaseholders - all separate flats would be under a single ownership (and Title). Then, leases are carved out of parts of the building until all that is left unleased is the residual freehold (including any parts not leased such as common entrance stairwells, sometimes roof etc.) for which the freeholder remains responsible - e.g. for insurance, maintenance etc. - but the leaseholders may be pro-rata liable.

When a freehold and leasehold interest are acquired by the same person for practical purposes (absent any deliberate legal maneuvering) the lease is treated as folding back into the freehold as if it no longer existed. So effectively back to the time before leases had been granted over all flats. The freeholder is then of course at liberty to grant a new lease to anyone they choose over the same (or even a slightly different) part of their freehold interest in the building - on new terms. But that is substantially a new disposal.

The notion of a 1/4 share in the freehold etc isn't usually how it works where a freehold interest in a building subject to multiple leases is acquired unless there is a declaration of trust (requiring ongoing variation with each lease assignment) - you acquire 100% of that superior interest subject to leases.

Acquire one of the leases absolutely and you've just extinguished it because it's not enforceable against yourself. You can grant a lease on different terms to a different person. There will be a presumption the original lease merged unless very clear evidence can be shown that this was neither the intention nor the legal reality of the transaction(s).

The point at which a nominee was required IMHO was when the freehold was acquired (to avoid a merging event). I would be happy to be directed to persuasive precedent it's not the case but on the face of things, merely granting a lease to a nominee before onward disposal may not be enough to defeat the presumption of an earlier merging of the superior and leasehold interests on acquisition of both by the same person.

In that case, the subsequent use of a nominee to acquire a new leasehold interest (no gain/no loss as no disposal) would not change the treatment of a disposal by the nominee as a part-disposal of the same (merged) equitable interest upon grant of the 999 year lease.

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By FactChecker
15th Jun 2024 12:57

Flying freeholds are not the only thing that can create all sorts of problems .. although like so much of this topic, which you'd think would be close to the heart of those who equate property ownership with wealth, in my experience it's not even well understood by many conveyancing solicitors.

And that's before you get on to Airspace rights, which are poorly defined in the UK - and yet there is trade in them.

FWIW I seem to remember someone once explaining to me that 'Freehold is not ownership, it's closer to a Lease in perpetuity'.
I presume this was a reference to the Crown owning the superior interest in all land in England, Wales and Northern Ireland (not sure about Scotland), so the perpetuity is the closest someone can get to outright ownership.
In most cases, of course, this semantic point is irrelevant - unless a freehold property becomes ownerless.

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By I'msorryIhaven'taclue
15th Jun 2024 14:03

kim.shaw-and-co.com wrote:

Where there were management obligations attached to the freehold interest (e.g. roof of a block of flats) ownership actually matters. It's not just about ground rents !

No express obligations to speak of in this case, although I wonder whether structure and roof are implied obligations. Just thinking aloud.

kim.shaw-and-co.com wrote:

In OP's case there will almost inevitably end up being a grant of a new lease in order to dispose of a leasehold interest under different terms. The original lease will have merged with the freehold when originally acquired for all practical purposes.

So, if I understand correctly, the original 2010 L/H property merged (in 2010) with the 2010 F/H bought as part and parcel of the same transaction (and, for that matter TD, from the same vendor).

kim.shaw-and-co.com wrote:

A freehold always precedes a lease. Therefore originally there will have been no leases granted to leaseholders - all separate flats would be under a single ownership (and Title). Then, leases are carved out of parts of the building until all that is left unleased is the residual freehold

When a freehold and leasehold interest are acquired by the same person for practical purposes (absent any deliberate legal maneuvering) the lease is treated as folding back into the freehold as if it no longer existed. So effectively back to the time before leases had been granted over all flats. The freeholder is then of course at liberty to grant a new lease to anyone they choose over the same (or even a slightly different) part of their freehold interest in the building - on new terms. But that is substantially a new disposal.

The notion of a 1/4 share in the freehold etc isn't usually how it works where a freehold interest in a building subject to multiple leases is acquired... you acquire 100% of that superior interest subject to leases.

Thank you, KS. That's a really clear and thorough explanation that's helped me get my head around the notion of a L/H merging with a quarter share of F/H to form a single asset. That (mis)conception was playing havoc with my OCD!

kim.shaw-and-co.com wrote:

Acquire one of the leases absolutely and you've just extinguished it because it's not enforceable against yourself. You can grant a lease on different terms to a different person. There will be a presumption the original lease merged unless very clear evidence can be shown that this was neither the intention nor the legal reality of the transaction(s).

TD's link earlier in the thread to https://www.penningtonslaw.com/news-publications/latest-news/2017/a-tale... alluded to "Intention to merge" (as one of the three requisites for merger); there's certainly no express intent apparent in this (our) case; and presumed intent is IMHO just too nebulous to fit the particular facts of the case.

kim.shaw-and-co.com wrote:

The point at which a nominee was required IMHO was when the freehold was acquired (to avoid a merging event). I would be happy to be directed to persuasive precedent it's not the case but on the face of things, merely granting a lease to a nominee before onward disposal may not be enough to defeat the presumption of an earlier merging of the superior and leasehold interests on acquisition of both by the same person.

That's cast-iron rationale!

Moot point, but I'm told the client's (online) solicitor quoted (now, in 2024) for granting an extened (or, as you yourself have mentioned, new) lease to a nominee. The client went for the cheaper option of a Deed of Variation in favour of the (imminent) purchaser. I'm not doubting what you say - just relating the client's version of events. Still, the information he's presented has been sparse and somewhat selective all along; not unlike when Joe Public wanders into this forum and spins us his version of a yarn!

kim.shaw-and-co.com wrote:

In that case, the subsequent use of a nominee to acquire a new leasehold interest (no gain/no loss as no disposal) would not change the treatment of a disposal by the nominee as a part-disposal of the same (merged) equitable interest upon grant of the 999 year lease.

I thought I'd leave your conclusion in for future readers, even though a nominee has been scratched from our particular plot.

Thank you so much KS for your excellent treatise.

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By I'msorryIhaven'taclue
14th Jun 2024 08:13

Thanks KS, I'm v grateful.

I can see how that would happen with a single dwelling house: one L/H title & one F/H title merged. What has me flummoxed is the one F/H / four L/H flats. I can't get my head round one-quarter of a F/H merging with one L/H. No doubt there will be a way of dividing that F/H, in the same way as the F/H to a farm may be divided up when sold in lots; but that would require a conscionable action by our client. I'm struggling to see how a merger would be the default position when there are many properties on a single F/H.

Other side of the same coin: client's solicitors have just processed a 999 year lease for the client's L/H flat. That wouldn't make sense had the F/H & L/H been merged.

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By Tax Dragon
14th Jun 2024 08:56

The one-in-four point is a red herring, n'est-ce pas? I own a two storey townhouse on the high street. I grant a ten-year lease for someone to use downstairs as a shop (permissions having been obtained). What am I left with?

Two, four, a hundred - what's the difference?

Ianal.

Read SP D1.

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By Tax Dragon
14th Jun 2024 09:40

This https://www.penningtonslaw.com/news-publications/latest-news/2017/a-tale... may give the legal answer [as at 2017]. Seems to agree with what our lawyer told us - ie merger isn't automatic - but also agrees my cannot-transact-with-yourself statement.

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By kim.shaw-and-co.com
14th Jun 2024 11:21

Tax Dragon wrote:

This https://www.penningtonslaw.com/news-publications/latest-news/2017/a-tale... may give the legal answer [as at 2017]. Seems to agree with what our lawyer told us - ie merger isn't automatic - but also agrees my cannot-transact-with-yourself statement.

.... which makes me question whether the statement(s) made about the taxpayer acquiring the (entire) legal and equitable interest in the freehold are correct. If they are, Lord Denning's view would seem to prevail. There could surely not be a valid re-grant after surrender whilst lease and freehold are under single ownership. But that doesn't mean there has been no merging of equitable interest in the freehold and the single lease.

Until there is an onward disposal of the lease (or freehold) there is no issue. When one is disposed of, in my mind it would be a part-disposal of the merged equitable interest.

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By More unearned luck
14th Jun 2024 12:06

Thanks for drawing my attention to the intention criterion.

There may be a new matter: the land registry says* "Agreements for the extension of leases are common. However, a lease cannot simply be extended by deed. A new lease needs to be granted.". This is consistent with ESC D39.

Is there a scintilla when there is no lease and thus the client is transacting with himself? Pointless idle speculation when the legal position can be simply ascertained by the OP asking his client's lawyers to explain and, I hope, reports back to us.

*https://www.gov.uk/government/publications/extension-of-leases

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By I'msorryIhaven'taclue
14th Jun 2024 12:08

Ahha... Condition #3 "No intention to merge". An equitable presumption against merger, perhaps? If, from a legal viewpoint, (non)-merger is a question of fact then I wonder whether HMRC's CGT treatment would automatically follow suit.

Thank you, TD.

There has been a recent (May 2024) Act that does away with marriage values - which would affect a Freehold Reversion valuation (presumably for post 24th May transactions - but nothing else relevant to this case that I can see. Late Edit: Other than standard 990 year leases going forward.

https://www.hja.net/expert-comments/opinion/residential-property-dispute...

Cannot transact with yourself: the conclusion highlights that there's no precedent, but that some believe it possible. But I'm with you... I need to see this deed of variation of charge as prepared by the client's solicitor to find out its mechanisms. Curiouser and curiouser!

Thanks again, I'm v grateful to you.

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By kim.shaw-and-co.com
14th Jun 2024 12:40

I&#039;msorryIhaven&#039;taclue wrote:

Cannot transact with yourself: the conclusion highlights that there's no precedent, but that some believe it possible. But I'm with you... I need to see this deed of variation of charge as prepared by the client's solicitor to find out its mechanisms. Curiouser and curiouser!

It's always going to be difficult when things boil down to a matter of legal opinion but remember the law prevailing at the time the freehold of the block was acquired is what matters.

For CGT purposes it's likely to be pretty simple. The original lease was acquired - base cost. The freehold acquisition is an enhancement. The variation is a non-issue. The disposal of varied lease (which may be treated as a grant of a new lease) is a disposal of part.

What does the Seller intend to do with the freehold after sale of the 999-year leasehold interest ?

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By I'msorryIhaven'taclue
14th Jun 2024 14:03

kim.shaw-and-co.com wrote:

It's always going to be difficult when things boil down to a matter of legal opinion but remember the law prevailing at the time the freehold of the block was acquired is what matters.

Thanks KS, I'm going to ask this afternoon for a copy of the deed of variation.

kim.shaw-and-co.com wrote:

For CGT purposes it's likely to be pretty simple. The original lease was acquired - base cost. The freehold acquisition is an enhancement. The variation is a non-issue. The disposal of varied lease (which may be treated as a grant of a new lease) is a disposal of part.

Thank you, KS. Re your final (bolded) sentence: would you agree it's possible that there may not be a part-disposal (of the F/H) IF the solicitors have structured the grant/extension of lease (from client with Freeholder hat to client with Leaseholder hat) through a nominee? I'm not sure they're as switched on as some of the contributors in this thread btw, but feel I should be requesting copies of docs in case.

kim.shaw-and-co.com wrote:

What does the Seller intend to do with the freehold after sale of the 999-year leasehold interest ?

Hang on to it. The Reversion value of his flat's share of the F/H is going to be worth nil, but he thinks the others will rocket in value. I haven't burst his bubble with the May 2024 Act that I linked to earlier in the thread - which is designed inter alia to reduce L/H valuations / premiums ie punish freeholders by removing "marriage values" from the value equation.

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By Tax Dragon
14th Jun 2024 14:05

kim.shaw-and-co.com wrote:

The disposal of varied lease (which may be treated as a grant of a new lease) is a disposal of part.

The very conclusion OP wants not to reach.

But rather than venturing further down this legal rabbit hole of what is and is not possible, I'd be asking myself whether the CGM extract and/or SP already referred to gave me what I wanted.

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By I'msorryIhaven'taclue
14th Jun 2024 14:42

Thanks TD, and I guess I need to establish firstly just how the (online) solicitors have structured the lease extension - whether to the client or whether to be granted directly to the flat's purchaser.

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By I'msorryIhaven'taclue
14th Jun 2024 17:30

It's the latter! Extended lease will pass directly from freeholder to purchaser upon completion. Solicitor had quoted for granting a lease via nominee, but too expensive for our protagonist!

I suspect the client knew all too well that this was the structure. Grrr! It's also a LPC case, and I'm guessing he's telling me BS still hopng to pay zero tax!!

Many thanks to all who replied - have a great weekend!

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By kim.shaw-and-co.com
14th Jun 2024 20:27

I&#039;msorryIhaven&#039;taclue wrote:

It's the latter! Extended lease will pass directly from freeholder to purchaser upon completion. Solicitor had quoted for granting a lease via nominee, but too expensive for our protagonist!

So basically, as regards total base cost the leasehold and superior interests treated as merged viz. s43 :

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg71400

Then the disposal of the extended Lease granted would be dealt with in the usual way :

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg70950

Hopefully the fees associated with the "variation" (substantially amounting to a surrender and re-grant) would reasonably be allowed as costs of disposal of the 999 year Lease.

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By Tax Dragon
14th Jun 2024 22:46

S43 being in point because it would not be possible to grant a 999 year lease over the flat (to the purchaser) without [if this hadn't already happened] first eliminating the previous leasehold by merging it into the freehold.

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