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Companies owning the freehold interest in a block of flats – lease extension potential tax issues

Please be aware that, in certain circumstances, as part of leasehold enfranchisement the extension of the residual term of a lease can raise tax issues for both the Tenant and for the Freehold Company.

Typically, there should be no tax issues where the Freehold Company acquires the freehold on trust (as nominee) for the Tenants as, for the purposes of direct tax, each tenant would already be beneficially entitled to a share of the freehold in respect of his or her flat. Therefore the lease extension would be granted by the Tenant (as freeholder) to him or herself (as tenant) and there will be no disposal for tax purposes.

Where Tenants extend their leases immediately following acquisition of the freehold by the Freehold Company, the Freehold Company would not normally suffer any tax charge in respect of the lease extensions (as the market value of the lease extension received by the Tenant will be equal to premium paid by the Tenant to the company). However, where there is a delay to the extension of the leases there is a risk that the market value of the lease extension received by the Tenant will exceed the capital contribution made for the purchase of their share of the freehold with consequent capital gains tax implications for the Freehold Company and therefore unanticipated corporation tax liabilities could arise.

Directors of a Freehold Company need to be aware of the above potential issue and, where appropriate, seek tax and valuation advice to identify the extent of any tax liabilities that could arise. Ian Pring, Tax Consultant at PKF Francis Clark LLP, specialises in property taxation and can be contacted to discuss matters on 01752 301010 or