Lease extension: Corp. Tax/"benefit in kind" implications?

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    Lease extension: Corp. Tax/"benefit in kind" implications?

    A question relating to leasehold extension that perhaps sbdy can help us with.

    We are five leaseholders of flats, already enfranchised for some time, who are respectively shareholders in and directors of the freehold management company of the five flats in the building. The existing leases have around 100 years to run, and we would like to extend them from the original 125-year term to 999 years (i.e. by 875 years).

    The key question is whether we can amend or extend the term clause of the leases without formally terminating the existing contracts and initiating successors for terms of 999 years. Our concern is that, if the answer to this question is that every lease extension requires legally the issue of a new lease (with the deed of surrender and re-grant), the following potential problems might arise:

    - Could HM Revenue & Customs take the view that the freehold management company has incurred a corporation tax liablility on imputed revenues from issuing new 999-year leases ?

    - If not, is it plausible that HMR&C might consider that the directors of the freehold management company have received a benefit-in-kind either at the current market value of a new leases or for the differential value between the retiring and new leases ?

    - Again from a fiscal viewpoint, would there be an imputed capital gains tax liability for leaseholders arising from lease replacement in the event of moving home ?

    While it is unlikely that any of the above would be intended in the spirit of leaseholder enfranchisement legislation, the incestuous roles of freehold owner/management/leaseholder, when taken at arm's length, could incur such unwelcome transaction costs ... or are we being overanxious on these issues ?

    Thanks ...

    #2
    (Conv. reply only)
    A lease term cannot be simply amended. The "extension" will in law be a Deed of Surrender and Re-grant, so:
    a. a new HMLR title number will be issued; and
    b. any mortgagee (lender) of a flat will need to be involved, in order to complete a Deed of Substituted Security too.

    Finally, there is no "benefit in kind". By buying the f/r (via the new company), all leaseholders have effectively already spent money on acquiring new asset- so granting replacement leases (one each) changes nothing for tax purposes.
    JEFFREY SHAW, solicitor [and Topic Expert], Nether Edge Law*
    1. Public advice is believed accurate, but I accept no legal responsibility except to direct-paying private clients.
    2. Telephone advice: see http://www.landlordzone.co.uk/forums/showthread.php?t=34638.
    3. For paid advice about conveyancing/leaseholds/L&T, contact me* and become a private client.
    4. *- Contact info: click on my name (blue-highlight link).

    Comment


      #3
      Enfranchised leasehold extension

      jeffrey,
      thanks for your speedy response. my concern lay with the fact that a leaseholder has a separate legal and fiscal personality from the incorporated freeholder (in this case management & ownership are undertaken by the same entity) ...
      if there were to have been assessable benefits arising from the differential value increases in the longer leaseholdings, it would not have been too serious (if transacted currently - a net present value of £7 per lease using the HMR&C stamp duty land tax calculator; no SDLT). it would be another story of course should new 999-year leases be treated as assessable on a 'stand-alone' basis in a leaseholder-freehold company-shareholder dividend revenue train ...

      Comment


        #4
        Jeffery, perhaps you would be so kind as to write a little more on this.


        FHCo owns FH. If it were a third party freeholder, then it would receive consideration from LHs in exchange for 'extension' of the lease.

        As LHs are shareholders in FHCo, consideration is nil, BUT as they are connected parties s287 (6) TCGA 1992, market value applies.

        So why do we not impute a taxable gain in FHCo? (In OP's case, of course, the npv is as near to nil as makes no difference.)
        The contents of this note are neither advice nor a definitive answer. If you plan to rely on this, you should pay somebody for proper advice.

        Comment


          #5
          Originally posted by Grange View Post
          Jeffery, perhaps you would be so kind as to write a little more on this.


          FHCo owns FH. If it were a third party freeholder, then it would receive consideration from LHs in exchange for 'extension' of the lease.

          As LHs are shareholders in FHCo, consideration is nil, BUT as they are connected parties s287 (6) TCGA 1992, market value applies.

          So why do we not impute a taxable gain in FHCo? (In OP's case, of course, the npv is as near to nil as makes no difference.)
          First, I'm not a tax expert.
          Subject to that, lessees form co. and fund its f/r purchase. It grants new (extended-term) replacement leases to them; they have already paid consideration re f/r purchase; so surely their new leases cannot trigger any extra tax liability?
          JEFFREY SHAW, solicitor [and Topic Expert], Nether Edge Law*
          1. Public advice is believed accurate, but I accept no legal responsibility except to direct-paying private clients.
          2. Telephone advice: see http://www.landlordzone.co.uk/forums/showthread.php?t=34638.
          3. For paid advice about conveyancing/leaseholds/L&T, contact me* and become a private client.
          4. *- Contact info: click on my name (blue-highlight link).

          Comment


            #6
            Taking another angle on this question from the leaseholders' viewpoint, and assuming the same circumstances:

            Would there be any circumstances, when executing the deed of surrender, where the retiring lease is treated as a disposal chargeable under UK capital gains tax legislation (for example, if a leaseholder's main residence was elsewhere) ?

            The answer to this point may shed some light on the treatment of implied revenues to the FHCo or implied benefits to LHs, since if there hasn't been a recognised 'disposal' as such, perhaps there hasn't been an accounting 'transaction' to report between the various parties either ...

            Comment


              #7
              From the leaseholders viewpoint, a liability to pay capital gains tax arises on the "profit gained" when an asset is sold at a higher price compared to its acquisition price ( but owner occupied property, PPR may be tax exempted )

              It was explained to me by an accountant that the "profit gained" on disposal sale of a "leasehold property" is reached by taking the "sale proceeds" and deducting the original purchase costs plus contribution cost to buying a share of the freehold company.

              So we should not see the change of original lease to another lease on different terms as giving rise to a capital gains tax liability because the property asset has not yet been sold.

              Comment


                #8
                Surrender & Regrant

                Originally posted by smnjas View Post
                Taking another angle on this question from the leaseholders' viewpoint, and assuming the same circumstances:

                Would there be any circumstances, when executing the deed of surrender, where the retiring lease is treated as a disposal chargeable under UK capital gains tax legislation (for example, if a leaseholder's main residence was elsewhere) ?

                The answer to this point may shed some light on the treatment of implied revenues to the FHCo or implied benefits to LHs, since if there hasn't been a recognised 'disposal' as such, perhaps there hasn't been an accounting 'transaction' to report between the various parties either ...



                Our situation is the same as yours. Did you ever go through with this and what was the outcome

                Comment


                  #9
                  This thread's been dead for 2.5 yrs., so don't hold your breath for an answer.
                  JEFFREY SHAW, solicitor [and Topic Expert], Nether Edge Law*
                  1. Public advice is believed accurate, but I accept no legal responsibility except to direct-paying private clients.
                  2. Telephone advice: see http://www.landlordzone.co.uk/forums/showthread.php?t=34638.
                  3. For paid advice about conveyancing/leaseholds/L&T, contact me* and become a private client.
                  4. *- Contact info: click on my name (blue-highlight link).

                  Comment


                    #10
                    CGT Leasehold Extension

                    I will not. You have to agree as this problem was never completely resolved it would have confirmed the situation once and for all. We have 2 solicitors and a tax lawyer who have already worked on this and each have a different opinion. After myself viewing the HMRC manuals on Capital Gains
                    It is clear that the Leaseholders do not incur CGT. Not so clear that the FHCO does not. I cannot believe that the 1992 CGT act was meant to penalise LH who had purchased their FH. It seems logical that as any extension of a Lease is already part of the Freehold which we already own and have paid for I don't see this as a recognisable disposal implied or otherwise. There being no accountancy transaction for the Lease.
                    However, I am by no means an expert and just hoped for clarity from someone who had already gone through with this.

                    Comment


                      #11
                      Is your "tax lawyer" a "qualified chartered accountant" expert in producing non-trading company accounts ?

                      Since no charge is made for lease extension to its own members , there is no reportable profit to declare in the annual accounts

                      I remember in another recent posting , somebody mentioned that private companies trading totally with its own members ( such as in private clubs ), are exempt for tax. The freehold company owned by leaseholders situation is similar to a company operating as a private club .

                      I suggest you ask the freehold company to write to HMRC and ask for confirmation that where leases are extended for its own memebers at Nil charge, there is no reportable profit to declare.

                      Comment


                        #12
                        Gordon, whilst some of what you say is no doubt true, you cannot take it out of context.

                        1. This is not "trading". This is a disposal of a property investment by a company. The exemption for trading only applies with certainty to companies limited by guarantee, and certainly does not apply to non-trading activities. A typical example is a golf club letting a flat to its members; the profits on this are taxable.

                        2. That there is no charge made is irrelevant for calculating the gain chargeable to corporation tax if the asset being disposed of has a value. Much as, if you own a valuable painting that you bought for a song and give it to me, you still have to pay CGT even though you receive no proceeds.

                        I cannot answer OP's question. Perhaps he would be kind enough to report to us the advice he has received from the various parties and we may be able to judge.

                        Comment


                          #13
                          Telometer : Just to clarify the situation further :

                          1. After the leaseholders collectively buy the freehold via their company, the shareholders ( i.e the leaseholders ) will propose their company ceases collecting annual ground rent. So the company is left owning a freehold property with no ground rent income (becomes a dormant company ).
                          2. Because mortgage lending is not freely available on leases falling below 70years and such leasehold flats become difficult to sell, the shareholders propose the company changes/replaces the leases to ones having longer term of 999 years at Nil annual ground rent without making any charge.

                          3. The company's investment in the freehold title has not been disposed and because no charge has been made for changing the leases, no profit will be gained and nothing is recorded as profit in the annual account .

                          So why do you say "This is a disposal of a property investment by the company "?

                          Comment


                            #14
                            Imagine you own the F/H of a property, and the leasehold interests in the flats are owned by third parties. You are charging a peppercorn ground rent, and the leases have 65 years to run. In 65 years' time you will have a valuable asset; accordingly today this has a (small, but real) value.

                            Instead, you then grant a new 999 year lease. No longer do you collect the asset in 65 years' time. You have made a disposal of a property investment. The disposal is of the right to use the property between 2075 and 3109.

                            If the leasehold interests were owned by third parties, there is no way you would have been prepared to do this without charging them, is there?

                            Comment


                              #15
                              I agree; but that's wholly unlike a leaseholders-owned co. being formed, using their £££ to buy f/r, then releasing their £££ by extending leases.
                              JEFFREY SHAW, solicitor [and Topic Expert], Nether Edge Law*
                              1. Public advice is believed accurate, but I accept no legal responsibility except to direct-paying private clients.
                              2. Telephone advice: see http://www.landlordzone.co.uk/forums/showthread.php?t=34638.
                              3. For paid advice about conveyancing/leaseholds/L&T, contact me* and become a private client.
                              4. *- Contact info: click on my name (blue-highlight link).

                              Comment

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