Lease Extension Subject to Taxation?

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    Lease Extension Subject to Taxation?

    Hi there. I live in a Victorian property which has been divided into 5 flats.
    Several years ago, three of the flat owners (including myself) purchased the freehold. The two remaining flat owners decided that they would not participate in the freehold purchase.
    A company was formed for the three freeholders. This company collects ground rent from the two leaseholders who are not freeholders. We submit accounts to companies house on an annual basis etc.

    Recently one of the two leaseholders (who are not freeholders) decided that they wanted to extend their lease. The original lease was for 99 years. The remaining term on their original lease was 66 years.
    The lease extension was granted for 99 years at a peppercorn rent. A new lease was drafted under the same terms as before (apart from the peppercorn ground rent).
    The leaseholder paid a substantial premium to the freehold company for granting the lease extension.

    Before we divide the premium between the three freeholders, my question is - are we (as the freehold company or as individuals) liable for any tax on this premium that was paid?
    I would be very grateful for any assistance.

    Was the lease bought in your personal names or in a limited company?


      Thanks. We acted as a limited company in order to process the lease extension. The limited company comprises the three freeholders..


        I'd leave the money in the company, and relieve the directors of paying service charge until such time as the cash is depleted.


          Thank you very much for your response - I appreciate any assistance.
          The only trouble is that there are two companies involved (I should have mentioned this previously!)
          One company is the freehold company (representing the interests of the freeholders - collecting ground rent, leasehold extensions etc).
          The second company is the leasehold company - this company includes all of the 5 leaseholders (including the 3 freeholders who are of course also leaseholders). This company is used for the day to day running of the property - collecting service charges, buildings insurance, property maintenance etc.
          I'm guessing this would alter your initial suggestion? As of course the service charges are dealt with by the leasehold company.


            Normally the freehold company will report the income received from lease extension as "annual profit" in its annual acounts which are produced after the year end.

            The profit will be reported in the tax return and about 13 months later the company get a tax bill of around 20%. The remaining 80% of profit can be retained by the company or paid out as dividend to its 3 shareholders.

            For tax year 2018/2019, there is a dividend allowance of £2000 per person which is Nil tax. Any excess amount above £2000 paid in dividend is charged at 7% ( Lower tax band ) or 32% ( higher tax band )

            If the freehold company acts as a "nominee buyer company" , the profit from lease extension belongs to the 3 freeholders ( not company ) and the 3 freeholders report one third profit on their own tax return ,

            Your accountant will advise you which situation applies.


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