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bigduckontax
bigduckontax, Accountant
Category: Tax
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I own the freehold to a house that I purchased in 1981. I

Customer Question

I own the freehold to a house that I purchased in 1981. I converted the house into 2 flats during the 1980's.
I sold the leasehold on one flat in 1987 - a 99 year lease - and at the same time gave myself a lease of 99 years on the second flat where I lived until it too was sold in 1999. Since this time, I have been receiving a small ground rent of £75/annum on each flat. I have declared this income each year.
In 2016 I was approached by the two existing leaseholders who asked for lease extensions on each flat. At the time of their request the remaining lease on each flat was approximately 70 years.
After a period of negotiation I eventually agreed 90 year extensions on each flat (taking each lease to 160 years) at a peppercorn ground rent. I received a premium sum for each flat. I received this money during the tax year 2016/17.
I am currently doing my tax return for 2016/17 and my question is what, if any, tax liability
do I have on the money received for the lease extensions and how do I report the situation on my tax return. For instance, I am assuming this may be treated as a capital gain (is this correct??) and, if so, does some form of taper relief apply (??). Obviously, I wish to minimise the amount of tax I have to pay.
Submitted: 29 days ago.
Category: Tax
Expert:  bigduckontax replied 29 days ago.

Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.

Here is the guidance from the Wealth Protection Report [UK and International Tax Planning]:

'The tax legislation distinguishes between capital and income treatment by looking at the length of the lease term. A premium paid for a very long lease is clearly a capital sum, as this is treated as a part disposal of the underlying freehold interest. In this case there would be a charge to capital gains tax.'

The premiums must thus be declared as a capital gain. Unfortunately taper relief has long gone, but you do have a non cumulative Annual Exempt Amount (AEA) of 11.3K to offset any gain.

Customer: replied 28 days ago.
Can you tell me what, if anything, I can legitimately include on my return to offset the gain or if there are any ways to dilute the tax liability for this year by, for instance, spreading the gain over more than one year?
Expert:  bigduckontax replied 28 days ago.

If you spread the gain over several tax years you can claim AEA for each computation.

I am rather surprised at the rating given.

bigduckontax and other Tax Specialists are ready to help you
Customer: replied 28 days ago.
Am I entitled to spread the gain over several years even though the gain is only in one year? How does this work
Expert:  bigduckontax replied 28 days ago.

it doesn't. If you make a gain in a year it is taxed in that year. To minimise CGT you must arrange transactions to stagger tax years, but this may not be possible.

Thank you for your support.,

Customer: replied 28 days ago.
Ok thank you
Expert:  bigduckontax replied 28 days ago.

Delighted to have been of assistance.