Tax to Pay on Lease Extension

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    Tax to Pay on Lease Extension

    Myself and partner own the freehold to the building we live in, this is in the form of a limited company. We were accidental freeholders as the previous freeholder wanted to sell and no one else living here wanted to buy it so we bought it to have some control over the service charges etc....

    We are extending another long leaseholders lease (which is another thread entirely on here due to a balls up by our managing agent) under a Section 42 statutory lease extension.

    Our question now is when we get the premium for the lease extension what tax implications does this have for us? Do we need to employ an accountant? As I understand it CGT would be payable if it is above the threshold. Due to the mess up by the agents it is only going to be a 10k premium rather than the 19-20k it should have been. This is way below the CGT threshold for the tax year isn't it?

    The company is 2 directors and we each own one share worth £1.

    I wish we had never bought the damn thing as it has caused us nothing but grief! But finally we may see a reward for the purchase price.

    Any help is greatly appreciated.

    #2
    If the freehold is held by a limited company, the lease extension income should (as far as I know) be income for the company.
    And companies don't have CGT or tax thresholds like people do (and pay tax differently).
    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

    Comment


      #3
      The income received for lease extension is declared as profit by the limited company and pays 19% corporation tax.

      The balance of profit is kept by the company or can be paid out as annual dividend and each shareholder has £2K dividend tax free allowance . So you may have to pay dividend over 2-3 years.

      Comment


        #4
        Gordon999,

        OK. Thank you for that. If we wanted to withdraw all the "profit" would we just have to pay the 19% corporation tax? I know dividends would be more tax effective but as we will be selling the freehold when we have sold our property, we want the money out. Is this all done via a self assessment form? We have never done any of this and didn't know if we need to employ an accountant or not.

        Comment


          #5
          Companies are listed at Companies House and required to submitted an annual return to Companies House.

          Visit the companies House website and enter your company number and check when the annual return is due or if overdue, there is automatic fine. Perhaps your agent has been submitting a return for you as a dormant company ( no ground rent income for the year .) and you are not aware.
          If the company pays dividend more that £2k to each shareholder, the dividend has to be reported by each shareholder using self assessment tax form . If you need help from a local accounting firm, look for a company offering bookkeeping and VAT services for small businesses and these companies are usually found in the suburbs of your town.

          Comment


            #6
            I would have thought that the lease extension is partial disposal assuming the freehold acquisition cost more than the lease extension, otherwise only the excess over the acquisition cost is profit.

            Comment


              #7
              Agree with theta, your company has incurred expenses of valuation, legal costs and actual cost of freehold.
              so now you have profit come in but you need to offset your profit against your expenses

              Comment


                #8
                Originally posted by divadee View Post
                If we wanted to withdraw all the "profit" would we just have to pay the 19% corporation tax? I know dividends would be more tax effective but as we will be selling the freehold when we have sold our property, we want the money out. .
                I am not clear why the company exists at all, there must be some reason it was created.

                But the company is a separate entity for tax and you and your partner are presumably directors of it.
                So the company operates its business and, if it makes profit, pays corporation tax at 19%.
                If the company pays you dividends as directors, those are taxed after the first £2k per annum.
                If the company pays you a salary it's income for you and taxed accordingly.

                If the company is closed down or sold, any increase in value of your shares is a capital gain and is taxable above your CG tax free allowance.

                It may help to talk this through with an accountant.
                When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                Comment


                  #9
                  actually there is a little known extra statutory concession under the terms of which corporation tax is not payable upon receipt of a premium for the extending of a lease where the lessee could exercise rights so to do compulsory under LRUHDA 1993. or the earlier Leasehold Reform Act.
                  The premium must be reinvested in land either freehold, or leasehold in excess of sixty years unexpired purchased either one year prior or up to three years after receipt of the lease extension proceeds. The land must be for investment/development, not a holiday home for yourselves. This puts the footing for tax purposes of statutory lease extensions on a similar basis as compulsory purchase. The land purchased can be anywhere in the world.

                  Comment


                    #10
                    flyingfreehold I didn't know that - thanks
                    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                    Comment


                      #11
                      Originally posted by theta View Post
                      I would have thought that the lease extension is partial disposal assuming the freehold acquisition cost more than the lease extension, otherwise only the excess over the acquisition cost is profit.
                      We paid 18,000 for the freehold and had legal costs of approx 2k for the purchase. This was 4 years ago though. Can we still offset purchase price over income 4 years later?

                      Comment


                        #12
                        Originally posted by divadee View Post

                        We paid 18,000 for the freehold and had legal costs of approx 2k for the purchase. This was 4 years ago though. Can we still offset purchase price over income 4 years later?
                        My understanding (with the caveat that I'm not an accountant) is that the proceeds are not income but partial disposal, therefore return of capital plus gains. Within a company there's no difference between CGT and income tax, but it does mean that you offset the original acquisition cost.

                        Comment


                          #13
                          Originally posted by flyingfreehold View Post
                          actually there is a little known extra statutory concession under the terms of which corporation tax is not payable upon receipt of a premium for the extending of a lease where the lessee could exercise rights so to do compulsory under LRUHDA 1993. or the earlier Leasehold Reform Act.
                          The premium must be reinvested in land either freehold, or leasehold in excess of sixty years unexpired purchased either one year prior or up to three years after receipt of the lease extension proceeds. The land must be for investment/development, not a holiday home for yourselves. This puts the footing for tax purposes of statutory lease extensions on a similar basis as compulsory purchase. The land purchased can be anywhere in the world.
                          Does that only apply where they "could have" and did, or also if the non statutory option is followed ?

                          Comment


                            #14
                            Originally posted by divadee View Post

                            We paid 18,000 for the freehold and had legal costs of approx 2k for the purchase. This was 4 years ago though. Can we still offset purchase price over income 4 years later?
                            You should look at the last set of company's accounts and check if the money to pay for purchase of the freehold is shown money as "borrowed from Director" . The situation may well be the company has made a loss £9K- £10K .and the funds held by the company can be paid back to Director to reduce the Director's loan.

                            Comment


                              #15
                              Originally posted by Section20z View Post

                              Does that only apply where they "could have" and did, or also if the non statutory option is followed ?
                              it applies where someone could exercise their right to compulsorily acquire. we have only claimed the extra statutory concession where an extension is granted strictly clause 56 of the act but it may be allowable on a non statutory extension at a nominal ground rent.

                              Comment

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                                Myself and partner own the freehold to the building we live in, this is in the form of a limited company. We were accidental freeholders as the previous freeholder wanted to sell and no one else living here wanted to buy it so we bought it to have some control over the service charges etc....
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