Ep46 How Tax and Leasehold Extensions Entwine?

property battlefield

Hello and Welcome to another podcast. Today I will be discussing Tax and lease extensions with Mark Chick and Philip Vickery Mark has previous been on the show in episode 19 How do Leaseholds work and episode 33 How do freeholds work?

Mark Chick leads Bishop and Seweels Landlord and Tenant Team and is recognised as a leading UK authority in this sector. He is a Leasehold Reform specialist and has been a Partner at Bishop & Sewell LLP since 2006.

He is also a director and a founder committee member of the Association of Leasehold Enfranchisement Practitioners AKA (ALEP) the sector body to which all reputable valuers and solicitors working in the field of Leasehold Reform now belong.

He regularly writes and speaks about enfranchisement and leasehold matters and is the author of two leading websites Leaseholdinfo.com and Leasehold Reform News.

bolstering the expertise for this podcast Philip Vickery a senior associate also at Bishop and Sewell has almost 25 years’ experience of advising on tax and trust matters, encompassing high net worth and ultra-high net worth private client matters, together with corporate, shipping, agriculture and property related tax issues. He has considerable expertise in advising on the tax treatment of trusts (both onshore and offshore), the tax implications of inward investment into the UK for non-resident companies and individuals, the application of double tax treaties, the UK taxation of non-resident and non-domiciled individuals, drafting of trusts, drafting and negotiation of M&A related tax indemnities and a wide variety of other legal documentation. Philip is accustomed to liaising with private banks, trustee companies and other professional advisers in multiple jurisdictions worldwide, to assist clients in achieving their objectives.

Mark - Philip welcome.

We’re just going to dive straight in A lot of people think that when they have purchased their freehold that ‘that is that’ and there is no further action to take. But, they could be wrong.

Why?

Because as a lease is a wasting asset, notwithstanding the fact that you may own the freehold via a share in a company, once the freehold has been purchased, the lease term still continues to diminish.

If you do not take some sort of action to extend the lease to say, 999 years and make it effectively ‘infinite’ then as the lease decreases in value you may be slowly storing up trouble.

Ideally all of the leases for participating flats should be extended at the time of purchase. If this is done (or if it does not need to be done as the leases are already very long) then this problem will not arise. However, if the leases are of ‘modest’ or ‘normal’ length and there is a delay between buying the freehold and extending the leases then there is a risk that this problem will arise.

What is the problem?

Effectively, CGT (Capital Gains Tax) is the problem. If the company grants a lease extension back to the leaseholder and the value of what the leaseholder gets back differs significantly from what was paid to receive this benefit in the first place (i.e. if the value of the lease extension is higher than the ‘cost’ of buying into the freehold), then the company has made a disposal of something of value and may well face a CGT liability.

As the company may have no assets or cash to pay for this (and why would it want to pay this expense on someone else’s behalf?) it will need to have this liability covered off (i.e. paid for by the leaseholder) before the lease extension is granted.

The moral of the story is therefore, don’t delay in extending leases to 999 years after completion, or to ensure that it is a requirement of your participation agreement that this is done.

In certain circumstances, there may be some ‘ways’ around the issue, but these are very much circumstance dependent. It is also likely that the company will need valuation advice. These issues have become the focus of discussion, including a recent debate at the ALEP Conference. in practice, I see a number of tax and enfranchisement issues on a fairly regular basis and freehold company directors should always consider carefully their position in such situations.