By Farhan Nagda FCCA MBA

A lease extension can protect value, improve mortgageability and make a flat easier to sell. But where the freehold is owned by a residents’ management company, extending the lease for no premium—or for less than market value—can create tax questions that are easily missed.

The risk is not confined to property investors. It can affect owner-occupiers, landlords, freeholders, resident-owned companies and the directors responsible for approving the transaction. The correct result depends on the legal and beneficial ownership of the freehold, the terms of the old and new leases, the consideration given and the relationship between the parties.

There is also an important timing point. The government is consulting on the valuation rules needed to implement major parts of the Leasehold and Freehold Reform Act 2024. Those reforms are intended to introduce 990-year statutory extensions, remove marriage value from the statutory price and cap the treatment of ground rent in the valuation. However, the government confirmed in July 2026 that the new enfranchisement valuation regime is not yet in force and requires further legislation. Current transactions must therefore be analysed under the law that actually applies at completion—not the expected future regime.

The key distinction: who really owns the freehold?

A block may be described informally as “share of freehold”, but that phrase does not settle the tax analysis. The title may be held by a company beneficially, or the company may hold it as nominee or bare trustee for the participating leaseholders. Those structures are not interchangeable.

If the company owns the freehold beneficially, the freehold is the company’s asset. Granting an extended lease can amount to a part-disposal by the company. If the company merely holds the legal title on bare trust, the beneficial owners may instead be treated as making disposals themselves. The trust documentation, purchase agreement, funding trail, Land Registry title and accounting records all need to agree.

Our specialist view: do not start with the assumption that every resident “owns their own piece of the freehold”. Establish the legal and beneficial ownership first. It drives the capital gains, company-distribution, reporting and valuation analysis that follows.

Why an extension can be a disposal even when no cash changes hands

An extension outside the rights contained in the existing lease normally takes effect as the surrender of the old lease and the grant of a new one. For capital gains purposes, HMRC treats the surrender as a disposal by the leaseholder. Granting the replacement lease can also be a part-disposal of the freeholder’s interest.

The absence of a cash premium does not necessarily mean the absence of taxable consideration. The old lease and the new lease each have value. Where a bargain is not made at arm’s length, or connected-person provisions apply, market value may replace the figure actually paid for capital gains purposes.

This is why a well-intentioned decision by resident-directors to grant all leaseholders 999-year leases for £1 can require more tax analysis than a conventional commercial extension. The transaction may transfer material value out of the freehold and into the extended leases.

ESC D39 is helpful—but it is not automatic

HMRC’s Extra-Statutory Concession D39 can allow the leaseholder’s surrender and re-grant to be ignored for capital gains purposes. Its conditions are precise. Among other requirements:

• the transaction must be on terms equivalent to those agreed between unconnected parties bargaining at arm’s length;
• it must not form part of a wider scheme or series of transactions;
• the tenant must not receive a capital sum;
• the property covered by the new lease must remain the same; and
• apart from duration and rent, the new lease must not contain material changes.

A nominal or deliberately discounted premium can make the arm’s-length condition difficult to satisfy. Changes to demise, rights, covenants or participation in a wider restructuring can also take a case outside the concession. ESC D39 applies only to the lessee’s position; it does not remove the need to analyse the freeholder’s disposal.

The company may have more than one tax exposure

Where a resident-owned company beneficially owns the freehold, granting an extended lease may create a company chargeable gain. The computation can require a market valuation of the lease granted, the surrendered lease and the interest retained. The original cost of the freehold is not necessarily deductible in full: the statutory part-disposal formula may apportion it between what has been disposed of and what remains.

There is a second issue where value is transferred to a shareholder-leaseholder for less than market consideration. HMRC’s company-distribution guidance recognises that a transfer of an asset at undervalue to a member can constitute a distribution. The tax position depends on why the benefit was provided, the recipient’s capacity and the detailed facts. Directors should not assume that an equal extension for every flat removes the issue.

Company law also matters. Before approving a transaction at an undervalue, directors should consider their duties, distributable reserves, conflicts of interest and whether the company’s documents authorise the arrangement. Tax and legal advice need to be coordinated.

What does it mean for the leaseholder?

The surrender of the old lease can create a capital gains disposal for the leaseholder unless a relief or concession applies. An owner-occupier may be entitled to Private Residence Relief, subject to the normal conditions and the property’s history. A landlord, company or person who has not occupied the flat throughout should not assume the gain is exempt.

The acquisition cost attributed to the replacement lease also matters when the flat is eventually sold. A contemporaneous valuation and a clear record of the premium and professional costs can be essential years later.

SDLT and linked transactions must be checked separately

A replacement lease is a land transaction. SDLT can depend on the premium, rent, property type, purchaser and any connected arrangements. Where several lease extensions form one scheme or a series between the same or connected parties, the linked-transactions rules may affect the calculation.

The SDLT analysis is separate from the capital gains analysis. Paying a market-value premium to support one part of the tax position may create an SDLT cost or filing requirement elsewhere. The terms should therefore be modelled before the documents are signed.

Professional fees: immediate deduction or capital cost?

Professional expenditure connected with a substantial lease extension will commonly be capital rather than an immediate deduction against rental income. HMRC distinguishes recurring property-business expenses from costs associated with acquiring or improving a capital asset. Where a long lease replaces a short lease, related legal and professional fees are generally capital expenditure.

That does not necessarily mean the cost is lost. Qualifying capital expenditure may be relevant to a future disposal computation. Accurate invoices should identify the work performed, and records should be retained with the lease and valuation.

A practical example

Suppose four flat owners each hold one share in a company that bought their building’s freehold several years ago. The company owns the freehold beneficially. The leases are becoming shorter, so the directors propose granting every shareholder a 999-year replacement lease for a nominal amount.

Before proceeding, the parties need more than a solicitor’s deed. They should establish the market value transferred to each extended lease; consider whether the company makes a part-disposal; test whether the benefit could be a distribution; examine each leaseholder’s surrender of the old lease and access to relief; review SDLT and linked transactions; and confirm the accounting and company-law treatment.

The answer may be manageable, but it should be known before completion—not reconstructed after a sale, remortgage or HMRC enquiry.

Our pre-completion review

1. Confirm ownership: who holds the legal title, who owns the freehold beneficially and what evidence supports that conclusion?
2. Review the documents: compare the current and proposed leases, including the term, rent, demise, rights and covenants.
3. Obtain valuations: value the interests transferred and retained on a defensible basis.
4. Map every tax charge: company gains, leaseholder gains, distributions, SDLT and any relevant reporting.
5. Classify the costs: record premiums and professional fees correctly for current accounts and future disposals.
6. Coordinate the transaction: ensure the tax analysis, legal drafting, valuation and company approvals are consistent.

How Edge Accountants can help

Edge Accountants provides specialist property-tax advice for leaseholders, freeholders, landlords and property companies. We work alongside your solicitor and valuer to identify the tax consequences before the lease extension or freehold transaction is completed.

If your block is considering lease extensions, a freehold acquisition or a change to its ownership structure, arrange a focused review before the terms are approved. Early advice can prevent an apparently simple transaction from producing an avoidable tax cost later.

This article is general information and does not constitute tax or legal advice. The outcome depends on the complete facts, documents and law in force at completion.