Lessees' own company is freehold reversioner- effect?

[Helen C]

I have several questions but have posted them under different threads.
The freehold of my property is owned by a management company which is limited by guarantee. Each leaseholder (15 properties) is a member with equal voting rights. If the freehold is owned by the management company of which all leaseholders are members, do the leaseholders effectively own the freehold?

[jeffrey]

I have several questions but have posted them under different threads.
The freehold of my property is owned by a management company which is limited by guarantee. Each leaseholder (15 properties) is a member with equal voting rights. If the freehold is owned by the management company of which all leaseholders are members, do the leaseholders effectively own the freehold?

Only indirectly. A lessee cannot sell part of the f/r, for instance.
Please be specific: why do you ask? What is the problem here?

[Helen C]

No problems. That question was just to satisfy curiosity as I am new to being a leaseholder. And lots of properties seem to be sold at higher values if they are with share of freehold - just wondered if that was the case here.

[jeffrey]

"Share of freehold" is a misnomer. What it usually means is "Freehold owned jointly with the other lessees via mgt. co."

[smnjas]

Picking up on a tangent from Helen C's query, and thinking purely hypothetically, if the leaseholders were to decide to extend their leases, does market practice view the extension as an internal administrative formality (i.e. just legal expenses & paperwork having already bought into control of the freehold) or is it treated as a formal 'arms' length' commercial transaction (i.e. assessable for taxation variously as if between independent parties) ? It would be interesting to hear other members' experiences of how joint freehold ownership impacts on leasehold extension ...

[jeffrey]

Lessees who already own f/r and grant themselves new leases simply returns capital to themselves without taxable consequences.

[smnjas]

Thanks for your reply, Jeffrey - your judgment reflects my assumptions on joint-freeholders extending their leases, otherwise owning a share of the freehold becomes a considerable liability in the context of lease extension.
Alarmingly, advice I've received from the Rev (as a joint-freeholder) looks to be claiming the contrary - i.e. each legal personality to be treated at 'arms' length' as independent counterparties - which could result in a synthetic taxation spiral on notional premiums/revenues, irrespective of whether any net funds actually move anywhere.

I can post more details if this is an appropriate topic here - it would be interesting to hear from other forum members (maybe joint-freeholders who have already extended leases as such) to verify if indeed this advice has been applied in practice ...

[jeffrey]

Yes- please tell us how HMRC reaches such a loopy conclusion.
Did it cite any statutory authority or references?

[smnjas]

Here's the gist: the proposition put to Revenue and Customs for confirmation ran to the effect that, since already-enfranchised tenants would not receive consideration for surrender and no premium would be payable for re-grant of leases, there would be no liability variously to taxation under coproration, capital gains, income and stamp duty land taxes.

The Revenue's argument runs roughly:
- a lease extension is an assessable transaction when extension is not provided for in terms of the existing lease
- leaseholders are same as directors & shareholders, therefore connected persons. They cannot transact at arm's length because they are not financially independent.
- leaseholders would be getting sthg for little or no cost and that would not occur between unconnected persons transacting at arm's length
- transactions between connected persons are to be treated as if conducted on terms between unconnected parties dealing at arm's length (i.e. enfranchisement is invisible for fiscal treatment of lease extensions wherever share-of-freehold applies)

The point was made that by design the leases are tied to the freehold by memorandum & articles of association and therefore worthless alone - the object of enfranchisement being a private residential, not commercial, imperative. Seemingly not significant for the arm's length criterion. It was also mentioned that the discretionary option to extend was considered paid for and taxed on buying the lease-with-share-of-freehold - again not acknowledged.

Apparently, because not at arm's length, an extension is processed like an acquisition with the peculiar properties that taxes designed to apply severally to independent counterparties are now concentrated in a stacked joint incidence ...
- freehold co (in effect = leaseholders) is vulnerable to corporation tax (as capital gain) on imputed premiums;
- leaseholder is subject to capital gains tax because surrender = asset disposal (principal private residence relief - I think - is available);
- stamp duty land tax may be applicable (not sure what might be imputed for SDLT - value of new lease or extension; I suspect new lease);

and, not specified by the Rev, but simply applying same logic from different angles, why not:
- shareholders taxed on income deemed to have been received as dividend distribution = differential value at arm's length between market prices of existing term and longer leases; OR
- directors taxed on income from imputed benefit-in-kind = differential value at arm's length between market prices of existing term and longer leases.

If I'm reading this correctly, this makes share-of-freehold more of a problem than an asset, whenever the moment for lease extension is chosen. The Rev's response is essentially derived from the manuals publicly available at the HMR&C website, which could explain why the response is somewhat generic and insensitive to the design of enfranchising legislation. Does this interpretation reflect the market experience, anyone ?

[smnjas]

A follow-through post on this subject ... are there no enfranchised leaseholders on the forum who have subsequently extended their leases & can give an opinion (strictly anon. of course !) ?

[jeffrey]

A follow-through post on this subject ... are there no enfranchised leaseholders on the forum who have subsequently extended their leases & can give an opinion (strictly anon. of course !) ?

The first leg of HMRC's argument is flawed. Any residential lease has statutory enfranchisement/extension consequences, implicitly by operation of law, so "lease extension...is not provided for in terms of the existing lease" is bonkers- it is statutorily so provided.
Did HMRC adduce any Court decisions supporting its idiosyncratic argument?

[smnjas]

No - only references to provisions in the HMRC manuals accessable on their website, so the interpretations of the 'arm's length' rules are probably going to be broad-brush & without specific reference to a (share-of-freehold &) leasehold context, the direct question notwithstanding ...

[twiglet]

cgt on lease extension premiums

Hi

Newbie - gentleness, please :-)

I posted this on TaxationWeb last week - no-one took it on, I'm afraid.

There was a similar thread here last year that seemed a bit inconclusive; does anyone know if the tax position is any clearer now?

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I'm a lessee in a shared freehold block of flats. All the leases have 55 years to run; we're contemplating extending.

We seem to have a choice whether or not to pay an extension premium. If we do, and the extension is for more than 50 years, we're being told the management company (which bought the freehold years ago, and in which each lessee holds a share) will have to pay cgt on the entire premium. Is that right?

If we don't (and it seems pointless to move money around in circles), would that avoid the tax bill?

I have a nasty feeling that's a horribly simplistic question; but there's always hope it might have a simple answer

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[jeffrey]

You all have two choices.
1. Individual lease extensions, adding 90yrs. to existing terms (and reducing ground rent to a peppercorn), if lessee has owned for at least two years.
2. Collective enfranchisement, followed by 'internal' lease extensions taking terms up to- say- 999yrs.
The second is better, as you pay L's fees only once.

[twiglet]

Your choice 2 was exercised years ago, when the then lessees bought the freehold company. I guess a trick was missed, because the original leases weren't extended at the same time.

In last year's thread I think you were arguing that an 'internal' extension could be done for no premium and without tax consequences. Would you still hold that view if the extension took place many years after the original enfranchisement, and when the original lease had a lot less than 80 years left to run?