The premium you paid for the lease extension is added to your CGT base cost for the leasehold interest. When you eventually sell the property, this higher base cost reduces the chargeable gain. The calculation sounds simple, but it is not always straightforward in practice. Where there have been multiple extensions over the life of the lease, each premium forms a separate enhancement to the base cost. Where part of the premium related to a non-residential element in a mixed-use building, the apportionment affects the base cost calculation. And where the extension was structured as a surrender and re-grant rather than a variation, the CGT treatment may differ.
The important thing is that the records from the lease extension are preserved in a form that will support a CGT computation when the time comes to sell. This means keeping the completion statement, the premium calculation, any professional advice received at the time, and — where relevant — the SDLT return showing the consideration breakdown.
If you are planning to sell the property within a few years of extending the lease, the interaction between the extension premium and the eventual disposal gain needs to be considered in advance. There may be opportunities to use the annual exempt amount, to time the disposal across tax years, or to make use of spouse transfers or principal private residence relief depending on the circumstances. These options are more valuable when they are considered before the disposal, not at the point of completing the CGT computation.
Where the leasehold interest is held by a company, the lease extension premium is a capital addition to the property asset for corporation tax purposes. The company needs to adjust its balance sheet to reflect the enhanced value of the leasehold interest, and the treatment in the corporation tax computation when the property is eventually sold depends on how the extension was originally accounted for. Getting this right at the time of the extension avoids complications in the disposal year.
Where leaseholders collectively purchased the freehold through a nominee company, that company has ongoing obligations that continue for as long as it holds the freehold. Annual accounts must be filed with Companies House. A corporation tax return must be filed with HMRC every year, even where the company has no taxable profit. If the company charges service charges to the leaseholders, there are additional accounting obligations under landlord and tenant legislation.
We regularly see nominee companies that have never filed a return because nobody told the leaseholders that the obligation existed. By the time this comes to light — usually when a leaseholder tries to sell and the buyer’s solicitor asks for company compliance confirmation — there are penalties, outstanding returns, and a compliance backlog to resolve under time pressure.
We review your post-extension position and ensure the CGT base cost is correctly recorded for future disposals. For company structures, we handle the ongoing corporation tax compliance and advise on the accounting treatment of the lease extension premium. For nominee companies, we set up or take over the annual filing requirements so the compliance is handled properly from the outset. We make sure the paperwork from the extension is preserved in a form that will support a future disposal computation without relying on memory or incomplete records.
Schedule a free 30-minute consultation to discuss your personal tax compliance.
