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Markel Tax

19 Mar 2018

True cost of extending a lease?

My client’s solicitor has told her that she can extend her lease for one of her residential properties for no consideration from the freehold company in which she is a shareholder. Should she be concerned about any taxes given no cash is involved?

The simple answer is yes. Even though no cash is physically changing hands, tax charges could be created and need to be factored into determining whether the transaction should be undertaken for nil consideration. 

There are three main taxes to consider:

Capital Gains Tax: the holding of the lease is considered as a capital asset for tax purposes. The extension of the lease is usually undertaken as surrender of the old lease and the grant of a new lease, so will trigger a capital gains event. Depending on the value and any reliefs available, tax could arise. In addition, even though the company has received nil consideration in respect of the lease extension, the transaction will not be considered as a bargain made at arm’s length and accordingly may fall within the provisions of s17 TCGA 1992. This is where market value is deemed as the disposal proceeds. Therefore, it may be advisable to pay for the lease to rely on ESC concessions that can apply.

Stamp Duty Land Tax: where a lease is granted at nil consideration and no ongoing rental is payable, the surrender/re-grant takes place between the same parties, no Stamp Duty Land tax arises. However, if consideration is paid, SDLT is likely to arise.

Income Tax: as the company has allowed value to be passed out of the company for nil consideration, there is a risk that HMRC will seek to assess that a deemed distribution of value has been paid out to the shareholders. If HMRC did apply such anti-avoidance legislation, then the shareholder could be liable to income tax on the deemed distribution amount. 

Given the taxes involved, we would recommend that specific tax advice is sought for the company and the leaseholders, based on their facts and circumstances. 

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