You’re getting legal advice. You’re probably not getting tax advice. That’s a gap that costs people money — sometimes significant money — because the tax implications of a lease extension are real, they’re often complex, and they’re almost always an afterthought.
SDLT applies to lease extension premiums, and the calculation is more complex than a standard property purchase. The rate depends on whether the extension creates a new lease or varies the existing one, whether it’s residential or commercial, and whether the transaction involves any consideration beyond the premium itself. We regularly see SDLT overpaid on lease extensions, particularly where the calculation involves net present value of future rent.
For freeholders on the other side of the transaction, there’s a potential CGT liability on the premium received. If the freehold is held by a company, corporation tax applies instead. And in some cases, particularly on commercial lease extensions where the option to tax has been exercised, VAT is in play too.
The Leasehold and Freehold Reform Act 2024 has made it easier and cheaper to extend leases by reforming the valuation methodology, which means more people are now going through this process. But the fundamental tax rules haven’t changed — and more transactions mean more people encountering tax implications they weren’t expecting.
This is specialist work that sits at the intersection of property law and property tax. We advise both leaseholders and freeholders on the tax consequences, making sure the full picture is understood before any deal is agreed. If you’re getting legal advice on a lease extension, you should be getting tax advice at the same time.
Your solicitor will tell you the premium. They won’t calculate the SDLT. We calculate the correct liability, identify whether any reliefs apply, and make sure the return is filed within the 14-day deadline. The calculation method for lease extensions is different from a standard purchase, and mistakes here are common.
If you’re a freeholder granting a lease extension or selling the freehold, the premium you receive is potentially subject to CGT. Your solicitor negotiates the premium — but the tax treatment of what you receive depends on how it’s characterised and the base cost of the freehold interest. We advise before terms are agreed, not after.
Where leaseholders collectively purchase the freehold, the SDLT position depends on how the purchase is structured. The formation of a residents’ management company, the allocation of costs, and the ongoing tax treatment of the company all need consideration. We advise management companies and individual leaseholders through this process.
VAT can apply to commercial lease extensions, particularly where the freeholder has exercised the option to tax. Mixed-use properties and developments can create unexpected VAT charges that neither your solicitor nor your general accountant flagged until completion. We confirm the VAT position as part of our overall advice.
A lease extension changes your asset for CGT purposes, and the premium paid forms part of the base cost on any future disposal. If you’ve acquired the freehold through a company, there are ongoing corporation tax and accounting implications. We make sure you understand the long-term position, not just the immediate transaction.
Schedule a free 30-minute consultation to discuss your personal tax compliance.
