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bigduckontax, Accountant
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To Tax Expert In 1985, I purchased a small freehold residential

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To Tax Expert

In 1985, I purchased a small freehold residential ground rent investment comprising two self contained flats. Each was let on c 99 years lease @ an annual ground rent of £50. The cost was c £1,500.

The lessee of one flat intends selling but has been advised that as her lease is now down to c.70 years remaining, mortgage lenders can be quite difficult.

The lessee has been advised that she is statutorily able to apply to have her lease extended by 90 years. Following a professional valuation, the premium payable would be c £20,000 @ a Nil ground rent

As this is a compensatory payment for the diminuition of an asset and not a sale, would CGT be payable or can it be rolled over until the asset is ultimately sold?

Hello, I'm Keith and happy to help you with your question


How the world moves on! When my parents bought their leasehold house in 1949 it only 32 years to run on the lease and they had no problem getting a mortgage and that was years before the Leasehold Reform Act!


I am in a slight degree of confusion here. Are you speaking for you or the lessee, please confirm. If it is you I have an answer ready.

Customer: replied 4 years ago.

Hi Keith


Thank you for your speedy response


I am speaking as the freeholder. Any tax liability would ofcourse be down to me


I gave you the info from both sides


Look forward to hearing further from you



Hi H If you look at HMRC information site PIM1205 it is explained there. If you grant a long lease the premium you receive is subject to tax. As Benjamin Franklin once famously said 'In life there are but two certainties, death and taxes!'


There are two ways premiums are taxed. If they are for leases under 50 years they come under Income Tax rules. They are taxed either as trading income or property income. The longer the lease granted the more goes into the property pot. However, if the lease is over 50 years the premium is taxed under Capital Gains Tax rules (CGT); the authority for this is s. 534, ICTA, 19688 and s.227 ITTOIA, 2005. There remain but 3 days of the current tax year so I will assume the change be in the next tax year. In 14/15 you have an annual CGT allowance of 11.1K leaving 8.9K to be taxed at 18% or 28% depending on your personal income level. You might be entitled to Entrepreneur's Relief which would reduce the CGT to a flat rate of 10%.


Worst case scenario is a tax bill of some GBP 2500.

Customer: replied 4 years ago.

Hello Keith


not sure I agree


firstly there is a further month to go the end of the tax year!


secondly, a proportion of the cost plus indexation (if appropriate) is deductible from the sale proceeds


thirdly and more importantly, I have heard there is a concession whereby if a lessee serves a Section 42 Notice under the 1993 Act, there is no CGT as the sale is compulsory by Statute and cannot be avoided


In the light of the above, please review your reply


Many thanks



You are correct in the time frame, sorry for the mental aberration there.


There is no indexation available in CGT. This was abolished some years ago. However any costs incurred in the grant of the lease extension can be deducted from the gain.


An extension under s.42 may be compulsory, but you have received a premium and that is a capital gain which is taxable. A parallel example is if you have shares in a company compulsorily taken over (eg when a bidder has over 90% of the equity) you are forced to sell, but if you have made a gain it is still subject to CGT.

Customer: replied 4 years ago.

notwithstanding indexation was abolished in c 1998, I think you will find it is still available for the period 1985 (date of purchase) to the date it was abolished


you should be aware there is roll-over relief provided the proceeds are re-invested in "land" either twelve months before the premium is received or upto three years later


With respect your parallel example is not comparable - in my case it is by statute. In your example it is a mere business matter only


I checked this out subsequent to your first reply!







Have a look at HMRC release CG10243 and you will see that Indexation is no longer available.

I am aware of Roll Over Relief. This is indeed available when a business asset is sold and the money reinvested in similar items within the year. A premium for a lease is not does not, I suggest, constitute a sale of an asset to trigger this relief.

I am now opting out of this question.
Reply to clear my question list.
bigduckontax and other Tax Specialists are ready to help you
Customer: replied 4 years ago.

ok down and out thanks

Thank you for your support.