Granting a lease extension typically produces a part disposal of the freehold interest. The premium received is the disposal proceeds, and the base cost of the freehold is apportioned using the standard part disposal formula. The resulting gain is subject to CGT at 18 per cent for basic rate taxpayers or 24 per cent for higher rate taxpayers, after the annual exempt amount.
However, the analysis is not always that simple. The CGT treatment depends on the legal structure of the extension. A variation of the existing lease, a surrender and re-grant, and a statutory extension under the Leasehold Reform Act can each produce a different CGT analysis. Where connected parties are involved, where the freehold is held through a nominee or trust structure, or where the extension forms part of a wider transaction, the computation becomes more involved. The key point is that the CGT position depends on the specific legal mechanics, not just the headline premium figure.
CGT on UK property disposals must be reported to HMRC within 60 days of completion. This is critical for freeholders because many do not realise that granting a lease extension triggers the 60-day reporting requirement. The obligation exists regardless of whether the freeholder considers themselves to be making a disposal — the statutory definition is broader than most people expect. Late filing attracts automatic penalties starting at GBP100, with further penalties for continued delay.
The CGT position should be understood before the premium is agreed with the leaseholder. Once the premium is fixed, the tax liability is crystallised. If the freeholder has capital losses available, annual exempt amount remaining, or other reliefs that could reduce the tax, these need to be factored into the negotiation. We calculate the net-of-tax position so the freeholder knows exactly what they will retain from the premium after CGT.
Where the freehold sits inside a limited company, the premium is subject to corporation tax rather than CGT. The computation follows different rules, and the company needs to account for the premium in its corporation tax return for the relevant accounting period. The 60-day CGT reporting requirement does not apply to companies, but the disposal must be included in the corporation tax return by the filing deadline. We advise on both routes depending on the ownership structure.
We calculate the CGT or corporation tax liability on the lease extension premium before terms are agreed. We prepare the part disposal computation, advise on available reliefs and losses, and handle the 60-day CGT report to HMRC or include the disposal in the company tax return as appropriate. We work alongside the solicitor handling the extension to ensure the tax compliance is completed within the statutory deadlines.
Book a free 30-minute consultation to discuss your property tax position with a specialist accountant.
