5 October 2023

Will lease extension be deemed a disposal for tax purposes? Elizabeth Small and Lucy Barber write for Taxation

Tax Partner, Elizabeth Small, and Head of Residential Property, Lucy Barber, have answered a reader’s question for Taxation on lease extensions.

In the article, entitled ‘Will extension be deemed a disposal for tax purposes?’, the reader asks:

“A client owns the freehold of a block of flats in London and granted a 99-year lease for one of the flats to a lessee some years ago. A premium was received which was subject to tax under the usual part disposal principles. The lessee now wishes to extend the lease to 999 years and a further premium of £10,000 will be paid. I understand that the premium is relatively small as there is little difference in value between a 99-year lease and a 999-year lease. It seems that the transaction will be deemed for tax purposes as a disposal of the old lease by the lessee and the grant of a new lease by the freeholder.”

Elizabeth and Lucy explain that typically, the extension will be outside the terms of the current lease and therefore it will be treated as though there was a surrender of the old lease and the grant of the new longer lease. Sometimes, it may be possible to ameliorate this by ensuring that there is not a surrender and regrant, and instead grant a reversionary lease which takes effect at the end of the term of the existing lease. A supportable valuation of the reversionary freehold interest and the value of the lease surrendered will be key to determining the tax impact, and awareness of these issues is key to ensure that a proportionate tax result is achieved.

The full answer can be read here.

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