There are around 4.5 million leasehold homes in England. Flats are typically leasehold, but houses can also be owned in this way.

With leasehold, the leaseholder (‘lessee’) owns the property but not the land it sits on. The arrangement means the lessee has a legal agreement called a ‘lease’ with the landlord (also known as the ‘freeholder’), which is either a management company or an individual.

Leaseholders are usually required to pay ‘ground rent’ to the landlord every year for a set amount of time. And when the lease comes to an end, ownership of the land and building returns to the freeholder.

Are there plans to change the law?

Under the current law, many people face high ground rents, on top of paying their mortgage.

And if you’re a lessee, you can ask your landlord to extend the lease on your flat by 90 years, or 50 years for your house.

But now the Government has proposed changes that would allow both flat and house leaseholders to extend their lease for 990 years, with no annual ground rent to pay.

The reforms have come about in response to the growing problem of newly built homes being sold as leasehold rather than freehold, and to limit ground rents on new lease agreements. The proposals are being considered by Parliament, and no date has been set for any changes.

Crackdown on unfair terms

Last month, it was revealed Aviva had committed to removing certain terms from its leasehold contracts that cause ground rents to double. Persimmon, meanwhile, said it would offer leasehold house owners the opportunity to buy the freehold of their home at a discounted price.

The move came after the Competition and Markets Authority (CMA) launched enforcement action against four housing developers in September 2020. In connection with this action, the CMA has also been investigating several investment firms that bought a large number of freeholds from two of these developers and continued to use these same ground rent terms.

Tax implications for freeholders

If you sell your freehold to a leaseholder, the profit from the sale of the asset is subject to tax.

From 6 April 2020, if you dispose of interest in UK residential property (wholly or partly), you have 30 days from completion to report and pay any capital gains tax (CGT) due.

If the freehold is owned by a company, there may be corporation tax to pay.

But the purchaser shouldn’t have any Stamp Duty Land Tax (SDLT) to pay, unless the amount involved is large enough to push it into the residential rates for SDLT purposes.

What if a lessee wants to extend their lease?

According to HMRC’s Capital Gains Manual, the terms of a particular lease may provide for its extension if the tenant asks. If such a request is made, the extension of the lease doesn’t have any immediate consequences for capital gains purposes for the lessee.

However, the extension of a lease outside its original terms involves the surrender of the old lease and the grant of a new one. Depending on the value and any reliefs available, there could be a tax bill.

In practice, the surrender of an existing lease and the grant of a new one shouldn’t be treated as a disposal for the purposes of capital gains, if the taxpayer so wishes and all the following conditions are met:

  • The transaction, whether made between connected or unconnected parties, is made on terms equivalent to those that would have been made between unconnected parties bargaining at ‘arm’s length’
  • The transaction isn’t part of or connected with a larger scheme or series of transactions
  • A capital sum isn’t received by the tenant
  • The extent of the property under the new lease is the same as that under the old lease
  • The terms of the new lease (other than its duration and the amount of rent payable) don’t differ from those of the old lease. Trivial differences should be ignored

Helping you with your tax

Leases are a notoriously difficult area of taxation, so if in doubt it’s recommended you take tax advice. At Churchill Taxation, our team can advise you on a range of tax matters, including property tax.

Call us today on 07813 434195 or email nicole.andrews@churchilltaxation.co.uk 

Nicole Andrews

Nicole Andrews

Tax director & co-owner of Churchill Taxation