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TonyTax
TonyTax, Tax Consultant
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I bought a flat as a second property in 1994 for £57000. In 2012 I extended the lease by

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I bought a flat as a second property in 1994 for £57000. In 2012 I extended the lease by 90 years (the maximum) for a premium of £7000. The valuation of the existing lease at that time was £168,000 and of the new lease £175000. In 2014, I sold the property for £195,000. Can I retrospectively claim that the deed of variation counts as a disposal and pay CGT on the gain between 1994 and 2012, then again between 2012 and 2014 when I sold it? If I do that I get two sets of allowance - one for 2012 and one for 2014, so I calculate that the CGT payable is considerably less.
Submitted: 1 year ago.
Category: Tax
Expert:  TonyTax replied 1 year ago.
Hi. I'm afraid not. The deed of variation is not a disposal in this case. You have simply added more time to the lease and so your gain will be £131,000 (£195,000 - £57,000 - £7,000). The first £11,000 of the gain will be exempt from CGT. You may get the gain discounted for any time that it was your main home and, if it was ever your main home, you will get relief for the last 18 months of ownership and letting relief. You can about these in HS283 here: https://www.gov.uk/government/publications/private-residence-relief-hs283-self-assessment-helpsheet/hs283-private-residence-relief I hope this helps but let me know if you have any further questions.
Customer: replied 1 year ago.
Many thanks for your speedy response. I've just found the reference that made me ask the question: http://www.taxation.co.uk/taxation/articles/2006/11/16/4531/lease-extension. I'm not an expert, of course, but the wording seems to give the impression that there is an option for the taxpayer to decide?"If the extension of a lease outside its original terms entails the surrender of the old lease and the grant of a new one, the surrender of the old lease is a disposal for capital gains tax purposes with the consideration received being the value of the new lease.However, Extra-statutory Concession D39 provides that the surrender of an existing lease and the grant of a new lease should not be treated as a disposal if the taxpayer so wishes and certain conditions (including that the transaction, whether between connected or unconnected parties, is made on terms equivalent to those that would have been made between unconnected parties bargaining at arms length) are satisfied."Can you explain where I'm wrong?
Expert:  TonyTax replied 1 year ago.
I knew what you were referring to and there is a better article here. Look under "Tax position of residential lessees". ESCD 39 effectively makes it a variation to the existing lease and not a disposal. I have never come across somebody who wants not to use ESC D39. Apart from having two CGT exemptions, there is no saving. That and the fact that everybody uses ESC D39 is why I gave the answer I did. You will be treated as having disposed of the property and not reported it to HMRC which will involve CGT, interest and a penalty for non-disclosure and possibly a stamp duty charge on the new lease cost. You will be treated as having sold the property and re-purchased it. If you completed a self-assessment tax return for the tax year of the change, you will have filed an incomplete tax return with penalty implications. The time limit for making an amendment has gone.
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15840
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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Customer: replied 1 year ago.
Thanks. That makes it exceptionally clear. Worth every penny (even though it's not quite what I was hoping to hear...)
Expert:  TonyTax replied 1 year ago.
Thanks.

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